The Outlook For FX

As the markets start to weather the storm of the great recession, what does the future behold for FX ?

FX has always persisted itself as a robust and growing asset class. According to the last Bank of Operational Settlements survey, the FX markets were accountable for $3.21 trillion of revenue globally.

At the recent FX Europe conference in London, Holger Neuhaus (HEAD OF FRONT OFFICE DIVISION, EUROPEAN CENTRAL BANK) painted a luck lustre picture of the storm that FX has weathered.“We are just starting to come out of the biggest financial meltdown that the modern world has encountered” he told the conference. The current recession far eclipses the great depression that happened in the 1920s. The term unprecedented is over used, but the current markets are in uncharted waters, the depths of which we have never encountered before.

Historically, the FX markets have always been well positioned to make money on both side of the currency flow in both bear and bull markets. This has allowed FX to flourish as both a transaction asset class as well as a speculators instrument of choice in volatile markets

As Ian Stannard (HEAD G10 CURRENCIES, BNP PARIBAS) explained “recent growth figures have been better than expected quarter on quarter”. This along with the quantitive easing programmes of the US Federal Reserve, Bank of England and European Central Bank has driven asset and commodity prices to an all time high this year.

As Ian Stannard went on to explain, the recovery has been driven by 3 factors :-

o Inventory rebound driving commodity and asset prices higher.
o Global fiscal stimulus and quantitive easing packages
o Rebound of exports due to introduction of new export finance programmes.

The picture of a market recovery is still very fragile with market sentiment debating if this will be a straight ‘V’ recovery or if the market will follow a double dip or ‘W’ profile , suffering a second re-alignment as recent gains are unwound.

From looking at the economic data available over the last 2 quarters,  the rate and speed of exit from the current recession far exceeds all previous recessions including the Great Depression in the 1930s. This angle of recovery is being driven by the global quantitive easing programmes from the Fed, Band of England and the European Central Bank.

How sustainable is the recovery ?
The ECB has stated that their repo funding programme will cease in December and that both the FED and Bank of England will be withdrawing Cash for Clunker / Car scrap page schemes in March 2010.

According to both Ian Stanndard and Holger Neuhaus, the FX markets have an inbuilt resilience to adapt to market supply and sentiment as the global quantitative easing programmes are withdrawn over the coming months. This will result in growth projections for next year being revised in early 2010 as recent asset and commodity gains are unwound and the markets find a new level.

As we look to what 2010 beholds, the only uncertainty is how you choose your currency risk and which side of the bid / offer spread you choose to sit on.

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