Positioning According to Major Macroeconomic Events

In the previous article we spoke about central bank interventions and underlined their significance both for short-term and long-term traders. And while some market players limit their attention to scheduled economic data releases, as well as monetary policy decisions or verbal interventions, they often ignore important macroeconomic events which tend to influence not only a single currencys valuation, but echo through the entire Forex market.

Among the most influential macroeconomic events which have the potential to reshape the markets are:

– Wars as a result of increasing geopolitical tensions
– G-7 meetings
– Major central bank meetings and other important summits
– Presidential or parliamentary elections in G-7 countries
– Debt defaults by large countries

Knowledge makes the difference

It is crucial for day traders to be informed and to know when one of those events might occur to have time to assess their positioning properly. Although you cant prepare for force majeure events such as natural disasters and in some cases major strikes in whole sectors, wars are usually predictable due to the growing geopolitical tension that precedes them. And because wars are accompanied by risk-aversion and safe-haven demand, traders who have foreseen the burst of war are able to protect their capital by investing in security-providing currencies (Swiss franc, Japanese yen) in a timely manner.

Being among the first to sell a higher-yielding currency and buy Swiss francs during a war will earn you high return as the thousands of traders that will follow your move will cause a strong rally in the safe-haven currency, appreciating your capital. At the same time, market players who were late to exit their long positions in higher-yielding currencies can experience dramatic losses. For example, the US dollar lost almost 10% against the Swiss franc in the three months leading to the war in Iraq due to the military interventions international unpopularity.

Terrorist attacks are a strong market mover as well, but their force majeure nature makes them unpredictable and unprofitable in advance. However, being informed in time, using capital protection tools (such as protective stops) and relocating your capital from riskier currencies to safe-haven ones can make the difference between losing most of your money and retaining it, or even profiting from the event.

A lot of attention is also pointed toward G7 meetings because the seven members, namely Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, together represent more than 63% of the net global wealth, according to Credit Suisses October 2013 Global Wealth Report. Not all G7 meetings are market movers, but when the member countries finance ministers are expected to announce big changes, broad market volatility is almost always observed.

Elections, broad sector strikes, debt default

Elections in major economies are closely monitored, especially at times of political instability, because the new government or president to step into power may impose a different policy and steer the economy in an alternative direction. In general, political instability and the possibility of an unpopular contender winning the elections cause a depreciation of the national currency, which in terms favors fading it.

Traders usually keep track of pre-election polls to get a general idea of what is about to come and how to position accordingly. This is why currency fluctuations are usually observed not only after the elections, but also during the campaign.

Another event worth considering are unscheduled elections. Such are held, if a government or president resigns or following a successful non-confidence vote or a presidential impeachment procedure. Usually a resignation comes as a result of the government/presidents inability to fulfill his obligations toward its/his electorate, as well as on the base of corruption scandals, protests etc.

Nationwide protests and sector strikes can be a decisive factor for a government to resign as they spur economic uncertainty, which in terms may lead to a decrease of the countrys sovereign credit rating. Just imagine what implications for the economy a nationwide strike of healthcare employees will cause, or if transportation labor unions decide to walk out even for just a day.

Debt default

The worst case scenario for a national currency is a sovereign default (national insolvency). There are different measures a government can take to avoid defaulting. However, even if it manages to do so, the arisen uncertainty would have already forced its creditors to require higher interest rates for the additional risk they have taken. Moreover, because sovereign defaults, especially among the more developed economies, are a rare event, the majority of investors who have turned to government bonds as investment vehicles are less risk-prone (they have a higher level of risk-aversion). Therefore, the possibility of default will significantly reduce the number of people who would want to loan money to this country, reducing capital inflows and demand for the local currency, which in terms will depreciate it.

Apart from the decline in incoming money flows, the economy will also suffer an outflow of capital as investors choose to invest somewhere else. Interior demand will also falter as the monetary wealth of many individual investors declines, further deepening the economic crisis. Depending on the banking system’s stability and its style of lending (aggressive or more conservative), a banking crisis may also occur as banks will need to write down credits given to the state. Needless to say, any sign of a country’s inability to pay interest on the capital it has attracted is factored in immediately on the financial markets, and being late on positioning yourself accordingly as an individual trader could incur significant losses.