Currency trading on macro trends has been difficult this year, and this strategist says 2012 will be no better. Here's how to cope.
Think the currency markets are volatile this year?
They are - but there's a catch, says Alan Ruskin, global head of G10 foreign exchange strategy for Deutsche Bank.
"On a year to date basis, the deviation between the strongest currency of the year (the CHF up 6.5% versus the USD) and the weakest (the CAD down 1% versus the USD) is less than 8%," only a fraction of the average range over the last 30 years. With currencies moving in relative lockstep, it's very tough to find profitable trades, he explains in a note to clients.
Unfortunately, Ruskin expects ranges to stay small into 2012, thanks to rock bottom interest rates in the G4 countries. " ‘The bread and butter’ of FX forecasting, short-end interest rates spreads, are remarkably stable, and presumably will be for the coming year as well," he says.
What's an investor to do? For starters, Ruskin argues that investors may be drawn to currencies outside the G10 in search of a little more movement and profit potential - so it may make sense to follow the crowd. Also, he says, "In 2012 our matching of strongest versus weakest currencies includes using the EUR as the main funder, and matching it against the USD and JPY longs."
Just don't expect smooth sailing, Ruskin says. "Barring contagion finally driving European capital out from the core," he says, "G10 ranges could prove frustratingly narrow relative to the breadth of the macro problems."
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Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.
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