FX Needs Crypto

Retail FX Market victim of liquidity

It is becoming harder and harder to exist as an FX trader in today’s market as more and more money is chasing less and less liquidity.

This week, the euro has traded in an eighty-four-point range totally negating the opportunity for day traders to make money.

I have long argued that the most effective portfolio is balanced between fundamental and technical factors and have spoken at several conferences about the need for traders to cognisant of the need to follow what is happening fundamentally. It has always been far easier for brokers to promote technical analysis as the most effective method of making money as it is a “textbook” trading method easy to teach and easier still to follow as it requires little imagination.

It really makes no difference if we are going to see ranges narrowing to virtually nothing as liquidity increases. This will bring the danger of traders extending themselves more as, particularly newcomers feel the need to take bigger positions to see the same return. of the three major currency pairs; Eur/Usd, Gbp/Usd and Usd/Jpy only Cable seems to be behaving in an old-fashioned way.

The Euro, as a conglomerate currency which is maturing as a reserve all the time and liquidity providers are relying more on more upon algorithmic pricing safe in the knowledge that the sheer volume of business they see provides a natural stop gap and a continual two-way market.

Dollar Yen is being controlled very tightly by the Bank of Japan with the tacit support of the Federal Reserve.

This means that there is a flow of speculative funds into cable which means that even moves like were seen on Thursday where the perfect storm of Brexit, Economic data and comments from the bank of England meant an orderly fall.

A Question for a Maturing Market

It may be a little harsh to judge the increase in the number of brokers actively promoting trading in Cryptocurrencies simply as a selfish method of making money as the more traditional market matures.

I see a real opportunity for a virtual market to develop where spreads come in to sensible levels and ample liquidity means that traders are not exposed to a risk they may not understand or have been exposed to.

The single most worrying aspect of a move from FIAT to crypto trading is the lack of a “lender of last resort and an asset which, at the end of the day could be worthy zero. Of course, there are naysayers who do not believe that Bitcoin, as an example, is no more than a con-trick promoted by the unscrupulous, but it is glib in the extreme to liken it to the South Sea Bubble or Tulip Market.

No one is going to guarantee the value of a widely traded cryptocurrency such as Bitcoin or Ethereum since it simply cannot be guaranteed. Smaller ICO’s that are backed by assets in individual businesses can be valued versus the underlying but lack volume to make them nothing more than niche plays in a global sense.

Permanent answer or stopgap measure?

When the Swiss National Bank pulled the rug from under carry trades by summarily removing its peg to the Euro in January 2015, it dealt a death blow to thousands of traders who had become far too comfortable with the notion that the top of the CHF versus the Euro was 1.2000.   

It also meant that longer term, the Euro was going to become what it has today; far from perfect but a true store of value rivalling the dollar and Yuan as the Reserve Currency of the future.

It is a surprise to me that given that there are many currencies that are freely convertible that traders and brokers have moved in such a quantum manner between traditional majors as mentioned above and cryptocurrencies.

For example, the commodity currencies provide healthy spreads, significant daily ranges and a lender of last resort. Frankly, I would prefer a position in the AUD than BTC right now since I am able to control my risk and understand the drivers.  

It may be a long shot, but it is possible that following Brexit the trading relationship between what were the commonwealth countries and the UK may be enhanced by new trade agreements which will lead to increased flow business and better conditions for trading those currencies.