2017 – the Year of the Trader – for FX Macros and Beyond
by Bill Hoerter / MTS-FX
How about a few headlines:
- The US is clearly out of its roughly five year hold on interest rates. BIG news.
- Our new POTUS has committed to growth, and campaigned on lowering corporate taxes, repatriating offshore capital and easing regulations, including the ACA’s rewrite. The heads of major institutions have been personally invited to dialogue with him on their state of affairs. This is also BIG news.
- Britain is leaving the EU’s trade and social umbrella, aka “Brexit”. France is next on the potential “Exit” train, with spring elections and a potential ultra-conservative leadership coalition elected. This is VERY BIG news.
- International relationships between sovereign and nuclear-armed nations are being questioned and re-examined in both positive AND negative terms. This is HUGE news.
Let’s examine pro-trading angles of various policy arguments and weigh in on the new, pro-growth Trump phenomena with which we are now living. First, interest rates have signaled a sea-change to its single most important underlying fundamental of the FX marketplace. Additionally, the coming Growth Agenda from the new administration is fostering huge optimism in all markets and among the vast majorities of traders of all stripes. We look new at the four main thrusts of this macro policy.
ONE: We have raced to the lowest possible interest rate profile globally. Where to now?
One word – UP. There are signs that America’s Fed’s “contagion” in Europe, where the ECB, copying the Fed template, had also raced their interest rates to zero for competitive-trade and liquidity-maintenance reasons among many others – is at long last coming to an end. As anyone who had traded FX prior to these suppressed Zero Interest Rate Policy (ZIRP) years will remember, this particular “fundamental” underlying our markets became extremely counter-productive to making profitable trades.
When, in the year from Nov. 2007 to October of 2008 the financial world collapsed, our Fed took our Fed Funds rate from over 5% to a mere 0.25%, greatly assisting our corporate balance sheets, aiding in rallying the precious metals hundreds of percentage points, but driving other assets, including the relative value of the USD, to untradeable status. Zero and in a few global instances, negative rates were soon achieved, which by definition, greatly stifles growth.
As Europe, via their central bank, the ECB, followed suit, the globally influenced foreign exchange marketplace became mired in a multi-year long range that effectively killed the great trading swings that can only come from the normal ebbs, flows and headlines driven by inter-country interest rate changes. The relatively flat, or range-trading established during the five years following that 2011-12 equalization of international central bank rates (at zero or extremely low) led to, among a few factors, to wide disinterest in trying to catch price moves and trends that simply did not exist.
The FX ANGLE: The lifting of ZIRP alone is the single most important fundamental driving foreign exchange trading on every level; including retail, institutional, and corporate.
Additionally, the Flat-Line in the quality of jobs has been brilliantly disguised for eight years as the cheap-money pump of the Fed’s QE-driven, balance-sheet-bloating disguise has greatly stifled Number Two – examined next.
TWO: A big one. (A topic unto itself, but condensed here): Growth in the workplace via rewriting the Tax Code, Repatriation, Regulatory Easing, and New Dialogues. What does this mean to traders?
The US has the highest corporate tax rates in the world, of the free-market giant economies – which leads to all sorts of issues. The movement of businesses offshore, particularly in the manufacturing, banking, and technology sectors, because of high tax rates and rising labor costs; has crippled many once-thriving urban areas across the American landscape. This fact along with the far-cheaper labor overseas, has led to the destruction of middle class families as millions of these once-thriving jobs have simply disappeared. Theory? Proven. Lower corporate tax rates drive growth exponentially once they are baked into the culture. Supply-side economics – it has worked in the past. It’s on the table again.
There is estimated to be over $30Trillion overseas, parked safely away from the punitive tax burden that its corporate sources would be subject to had these profits been earned within the United States. The new administration has pledged to end this burden, via a number of methods – including lowering the corporate rates outright, plus offering corporations some kind of “tax holiday” on repatriating their offshore holdings. We bring in $30Trillion of workable capital, and the results are self-explanatory.
The promised reexamining of Regulatory Burdens, as in Dodd-Frank – placed on the business community writ large, is a phenomenon largely reviled by Small Businesses and homeowners as severely curtailing their access to capital and credit – which has been THE largely unintended consequence of its creation. Passed into law on purely partisan grounds, it has taken sharp effect within the last decade, and for ostensibly the “right” reasons – Including consumer protection and the abeyance of bad business practices – yet the unintended consequences of these good intentions has been to the great detriment of small business provenance. The promised rewrite of D-F, and lessening its burden to business in general is perhaps the single-most anticipated change coming to Trump/America’s newly freed markets.
Also in the “quick-start” pipeline is rewriting the “Affordable” Care Act. This insurance reform alone will allow companies big AND small the ability to properly project their costs and honestly assess their budgetary needs – something missing in business governance for at least 4 years – yet another factor which has led to hiring stagnation.
Finally, the visitation by invitation of union bosses, corporate heads, and industry leaders across all sectors to the White House in the first weeks of the Trump administration is a precedent-setting seminal event in earning trust between government and the private sector – two groups traditionally at odds with one another. There is NO downside to these events, and will lead to Corporate Confidence, likely the single greatest factor driving free markets.
Job creation, from any and all of these changes in the marketplace leads to wealth creation, which leads to consumption of commodities, and the investment of capital. These are all necessary things for thriving economies, and create a continual tapestry of investment opportunity.
The FX ANGLE: The transfers of currencies from place to place leads to tremendous foreign exchange opportunity, which in turn drives price action. This is Trading 101 – movement equals price action, which yields profit potential. Economic growth by itself, leads to capital and wealth creation on both institutional and private fronts; as companies large and small create new income and traders accumulate wealth via profits. This capital creates reinvestment and ultimately tax revenues that lead to greater growth when shepherded properly.
The Chicken lays the Egg, which hatches the Chicken. No one cares who came first.
Next, we look at the “Trump Contagion” caught, evidently by the Eurozone; moving off the very liberal, open-border globalism path to far more protective and proactive border/trade policies. Finally, we will conclude by looking at the over-arching threat of terror and geopolitical strife in a nuclear armed world, certain to be market-moving landmines lying just under every surface our planet’s citizens walk upon.
THREE: Trade. As countries exit the restrictive Eurozone, new trade deals will present themselves. As deals are, by nature, a self-fulfilling prophecy – all free-market economies will jump on board.
The first visitor to Pres. Trump’s White House was Britain’s Prime Minister. The second was Japan’s Abe. Both visits went well from the publicity standpoint. Yet another has just happened: the young and photogenic PM of Canada, Justin Trudeau had a state visitation – with both he and Mr. Trump singing from the same (trade cooperation – defense) songbook. A major overture was also just made to China’s leader, smoothing a potentially rough rhetorical road. Still on the docket are Australia, France, Israel and, yes, Mexico – among others. This, in the first three weeks of this POTUS taking office.
The Trumpian (read: record) pace of fostering business between sovereign nations is proving to be unique in political science – and one of the main reasons he has garnered huge support among savvy traders. The Art of the Deal, boardroom-style, is now morphing into the Body Politic, and is very likely to become THE template for modern global governance as the world becomes increasingly capitalistic, and less socialist/globalist. Just as our American Democratic Party has lost credence and viability among our population, so have the open-door socialist’s control over an increasing number of countries from Europe to Asia.
“Big Markets” IS the new “Big Government”. Conservative vs. Progressives in the classic, partisan template, is becoming the new playing field for 2017.
The FX ANGLE: As BAD deals are reexamined, rewritten or discarded – and NEW Deals written – capital will move across borders, and among countries, requiring the constant buying and selling of currency pairs, and the reconfiguring of balance sheets for both export and import accounts. This is THE lifeblood of foreign exchange trading on every level.
FOUR: The single overriding, over-arching factor, Martialing the Peace.
There is not much to opine on this topic that you cannot hear simply by turning on any cable station or reading material online, about geopolitics and world affairs. Just a partial list: ISIS vs. the World. Islamic Jihad practiced in 50 countries, and rejected by far more. Russia vs. the Baltic States and others. Mideast borders constantly redefined, constantly at odds with one another. Nuclear powers threatening one another while smaller countries aspire to become one – simply to be mentioned in the same insane conversation. Factions of zealots trying to obtain the technology they have little understanding of other than that it can destroy human life on a grand scale – THE stated goal of Islamic Jihad.
War, and being on a war-footing, is still a dominant factor driving international relations. Figuratively, at the touch of a button – or the initiation of a single seemingly benign event in an unstable territory, can begin what most of the world seeks to avoid – nuclear confrontation. “Less” stable countries, along with those espousing the bastardization of a religious ideology without borders, seek to actually USE this existential threat to global life simply because they can if allowed.
The less catastrophic outcomes of this level of geopolitical confrontation is Economic Sanctions – equally important now less warlike to those involved. The financial implications and the impressions it leaves on the population of countries involved – in spite of the fact that they are always targeting governmental policies specifically – are often quite punitive, and counter-productive to growth. This economic side of the politics of martial preparation, in-country, is but another factor to be reckoned with in this global calculus.
These are NOT the back-burner issues of our time – they are in reality, THE issues around which the future of the planet revolves. Peace MUST be created, and it will come about via negotiation, or by conflagration, with little in-between, and drives markets of all kinds on a moment’s notice.
The FX ANGLE: What is MOST trader-relevant, are these Headlines. They drive movements of capital, and therefore currencies, to both risk-on and risk-off investments of all types in an ever-changing tapestry of change, all over the investment spectrum. Headlines trump normal movement of capital, and therefore price action in and out of all instruments. Trends become meaningless, and the normal ebb and flow of prices is thrown out the proverbial window for traders.
We in the trading community all learn early how to either actively seek or completely avoid “headline trading” – but its existence always makes for opportunities to profit, or loss, as they present themselves. How to trade on headline news and the “marketplace” reactions is one of the oldest questions asked by every single trader – from the retail home hobbiest to the great institutional desks around the world.
In Conclusion: We hope you’ve enjoyed looking at the factors that we believe will drive a resurgent trading template in the coming years. Derived from a New Boss in the White House, a CEO by trade and therefore not bogged down by politics-as-usual, and who seemingly works 20 hours a day on the Country’s Business – we believe we are embarking on a venture of purely Intended Consequences. This is THE new resurgent potential for trading via every reason cited in this article.
In future pieces we will cover the how’s, where’s and why’s of this investment landscape, and what a savvy trader can do to build wealth and enjoy the fruits of their labors by what is one of the great freedoms enjoyed by all capitalists: the speculative use of your dough. Stay Tuned.
Bill Hoerter / MTS-FX
William (Bill) “ChicagoBill” Hoerter **
Bill has worked in the financial services (futures, options and spot foreign exchange) for 35 years. His decade on the IMM trading floor and subsequent move to the “provider side” found him working for some of the largest clearing firms, merchant or investment banks and non-banks in the world. Many years on trade desks found him providing liquidity for FX traders from Globex’s original pool, pricing for floor-trading “locals”, and normal “retail” traders to some of the largest hedge funds in the US. This afforded him tremendous insights to the daily mechanisms of the leviathan that is the over $6.5 trillion-per-day global Forex marketplace. As Chief Dealer, Risk Manager and spokesperson for Chicago-based trade desks, his opinions had been sought after and often quoted by various international news services and daily FX reporting sites both online, in newsprint, and on multimedia outlets in the early 2000’s.
** Today you can see and hear him on www.mrtopstep.com where he runs the MTS-FX division with his trading partner, Master Trader Vince, in their daily trading/training live room experience – seen here: https://mrtopstep.com/mts-fx/