« If you want to know the size of your assets, you have to count the people below you. »
Real lines, if you want to be at the top, you have to keep everyone else under your feet so that you can stay out of their reach. This is how most or I must say that all the major and minor economies of this world work and that this whole system is disrupted, there is a need to update the system and in a process of updating the everything stops except the update itself. What are these updates in the economic system? The most relevant answer is war, PANDEMIC, recession, depression or global emergencies.
Now let’s talk about the current COVID-19 pandemic scenario. There are many questions that disturb our notion when we speak or think about this brutal disease, like:
Q1: Why did this happen?
Q2: Who will benefit?
Q3: What will be the advantages of this pandemic situation?
Q4: What will be the impact on Big Business Houses? Who will lead the economic pipeline after it is finished?
Q5: Is this a goat litter for many sins committed by the capitalist? (Bank fraud, insolvency, mergers and acquisitions)
Q6: How will everything bounce back?
Q7: Last but not least, why should we analyze all of these factors and how will we benefit from them?
So, first of all, let’s put aside all the conspiracy theories related to this pandemic. Why do I say that? This is because no supreme power wants to lose its people by taking into account the lines cited by John Locke « – POWER = WEALTH = CONTROL, « IF POWER COMES FROM PEOPLE »
Now is the time to discuss a common logic behind COVID-19, its impact on the global economy and how we will benefit from it, please read the tips below: –
1) Do you prefer to buy luxury items like expensive cars, perfumes, exotic vacations, etc. after closing? Your answer will probably be NO and if the answer is YES, so congratulations, you are the child of a renowned politician or business magnet or you are probably the client of Carlos & Company. Joking aside, it is good that all disposable income is then spent on basic necessities such as health care, groceries (especially mass consumption and agri-food products), insurance and investments.
All of the above options will boost economic activity globally and, therefore, all centralized banks will inject huge sums of money into their economies, which can further increase imports and exports. Fruitful return, the Forex market will get a healthy dynamic. We all know that all major economies are aware that the currency freeze after the tightening will occur globally, because currencies may begin to devalue, to cover this risk, they are ready with QE and helicopter money to stabilize the currency market. Now is also the time to position yourself by acquiring new businesses and merging, as almost all of the company’s shares around the world will trade at very attractive prices. Mergers and Acquit ions require and launch large chunks of silver to get around the market.
Thus, our main focus will be the Forex markets, the insurance sector, argo-based companies like fertilizers, seed companies and other auxiliaries, agribusinesses, investment industries and banks as well as the bond market ( in particular corporate bonds).
Why all these industries?
This is because due to this economic buffer, almost all the major rating agencies have downgraded the scores of developed and developing economies. This will have an impact on the currency of the country concerned and, therefore, most currencies will start to devalue. To control this devaluation, the main currencies such as the dollar, the euro and the GBP will increase their supply thanks to quantitative easing.
Risk aversion is a kind of trading behavior exhibited by the foreign exchange market when a potentially unfavorable event occurs that can affect market conditions. This behavior occurs when risk-averse traders liquidate their positions in risky assets and move funds to less risky assets due to uncertainty.
In the context of the foreign exchange market, traders liquidate their positions in various currencies to take positions in safe havens, such as the US dollar. Sometimes the choice of a safe haven currency is more a choice based on prevailing feelings than on economic statistics. An example would be the 2008 financial crisis. The value of stocks around the world has fallen while the US dollar has appreciated. This happened despite the high concentration of the crisis in the United States.
Important concepts to keep in mind
The « carry trade » refers to the act of borrowing a currency that has a low interest rate in order to buy another with a higher interest rate. A large difference in rates can be very profitable for the trader, especially if high leverage is used. However, with all leveraged investing, it is a double-edged sword, and large swings in exchange rate prices can suddenly tip transactions into huge losses.
This is the main reason why we will focus more on Forex activities as well as on indices and instruments of the risk paradise.
The main financial instruments on which we must keep a close eye are the following: –
A cash transaction is a two-day delivery transaction (except for transactions between the US dollar, Canadian dollar, Turkish lira, Euro and Russian ruble, which are settled the next business day), unlike to futures contracts, which are usually three months. This trade represents a « direct exchange » between two currencies, at the shortest time, involves money rather than a contract, and interest is not included in the agreed transaction. One of the most common types of Forex trading is spot trading. Often, a forex broker will charge a small fee to the client for deferring the expiring transaction to a new identical transaction for the continuation of the transaction. These turnover costs are called swap costs.
One way to manage currency risk is to make a forward transaction. In this transaction, the money does not actually change hands until after an agreed future date. A buyer and seller agree an exchange rate for any future date, and the transaction takes place on that date, regardless of market rates. The duration of the exchange can be a day, a few days, months or years. Usually the date is decided by both parties. Then the futures contract is negotiated and agreed to by both parties.
Undeliverable transfer (NDF)
Currency banks, ECNs and prime brokers offer NDF contracts, which are derivatives that have no real deliverability. NDFs are popular for currencies with restrictions such as the Argentine peso. In fact, Forex hedging can only hedge these risks with NDF, since currencies such as the Argentine peso cannot be traded in open markets like the major currencies.
The most common type of forward transaction is the currency swap. In an exchange, two parties exchange currency for a period of time and agree to cancel the transaction at a later date. These are not standardized contracts and are not traded on an exchange. A deposit is often required in order to keep the position open until the end of the transaction.
Futures are standardized futures contracts and are generally traded on a stock exchange created for this purpose. The average duration of a contract is around 3 months. Futures contracts generally include any amount of interest.
Currency forward contracts are contracts specifying a standard volume of a particular currency to be traded on a specific settlement date. Thus, currency futures are similar to bond futures, but differ from futures by the way they are traded. In addition, futures contracts are settled daily by removing the credit risk that exists in futures contracts. They are commonly used by multinationals to hedge their currency positions. In addition, they are traded by speculators who hope to take advantage of their expectations regarding exchange rate fluctuations.
A foreign exchange option (generally shortened to an FX option only) is a derivative in which the owner has the right but not the obligation to exchange money denominated in one currency in another currency at an agreed exchange rate at a specified date. The FX options market is the deepest, largest, and most liquid market for options of any kind in the world.
Economic factors to include in our analysis when making any business decision: –
Economic factors include: (a) economic policy, disseminated by government agencies and central banks, (b) economic conditions, usually revealed by economic reports, and other economic indicators.
Economic policy includes government fiscal policy (budget / spending practices) and monetary policy (the means by which a government’s central bank influences the supply and « cost » of money, which is reflected in the level of interest rates).
Public budget deficits or surpluses: The market generally reacts negatively to the worsening of public budget deficits and positively to the reduction of budget deficits. The impact is reflected in the value of a country’s currency.
Levels and trends of the trade balance: The trade flow between countries illustrates the demand for goods and services, which in turn indicates the demand for a country’s currency for trading. The surpluses and deficits in trade in goods and services reflect the competitiveness of a nation’s economy. For example, trade deficits can have a negative impact on a country’s currency.
Inflation levels and trends: Typically, a currency loses value if inflation is high in the country or if inflation levels appear to be rising. Inflation is eroding purchasing power, and therefore demand, for this particular currency. However, a currency can sometimes strengthen when inflation rises due to expectations that the central bank will raise short-term interest rates to curb rising inflation.
Economic growth and health reports such as GDP, employment levels, retail sales, capacity utilization and the like, provide all possible details on the levels of economic growth and health of a country. In general, the healthier and more robust the economy of a country, the better the performance of its currency and the more demand it will have.
Productivity of an economy: the increase in productivity in an economy should positively influence the value of its currency, the effects of which are more marked if the increase concerns the commercial sector.
How do we manage all of these psychological factors?
Market psychology and operator perceptions influence the foreign exchange market in different ways: –
Flights to quality: The disruption of international events can lead to « quality flight », a type of capital flight by which investors transfer their assets to a « safe haven ». There will be greater demand, and therefore a higher price, for currencies perceived as stronger than their relatively weaker counterparts. The US dollar, the Swiss franc and gold have been traditional havens in times of political or economic uncertainty.
Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growth season like physical commodities, economic cycles are felt. Monetary cycle analysis examines longer-term price trends that may arise from economic or political trends.
« Buy the rumor, sell the fact »: This market strategy can be applied to many monetary situations. It is the tendency of the price of a currency to reflect the impact of a particular action before it occurs and, when the predicted event occurs, to react exactly in the opposite direction. This can also be called an « oversold » or « overbought » market. Buying the rumor or selling the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of external events to currency prices.
Economic figures: While economic figures can certainly reflect economic policy, certain reports and figures have a talisman effect: the number itself becomes important for market psychology and can have an immediate impact on market movements in the short term . « What to watch » can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation figures have all taken center stage.
Commercial technical considerations: As in other markets, cumulative price movements in a currency pair such as EUR / USD can form apparent patterns that traders can try to use. Many traders study price charts to identify such patterns.
Ping us to find out how to trade covid19.