eurozone

REWARD TO RISK RATIO ANALYSIS

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FEDCAUTIOUS T O N E

JULY - SEPTEMBER 2016

A FINANCIAL AND POLITICAL TURNING POINT. NEW THREAT TO EUROPE. RISK TO EMERGING MARKETS AND THE ROLE OF POLITICAL AND FINANCIAL ELITES

ORDER FLOW FOR DISCRETIONARY QUANT

TRADER MAGAZINE STAGES OF PRICE MOVEMENT

DOLLARMID-YEARREVIEW

challenges DERIVATIVESMELTDOWN RISK

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FXCONTENTs

EURO, ECB AND EUROZONE PAST AND UPCOMING CHALLENGESHow economic fragilities and a number of political conflicts are threatening the region’s recovery

50

No rate hike on the way for July24

07 EDITOR’S NOTE

BREXIT SPECIAL

11 A Financial And Political Turning Point: the new threat to Europe, the risk to Emerging Markets and the role of political and financial elites

15 Brexit and the Derivatives Meltdown: How to avoid collapse of the massive derivatives house of cards?

39 Brexit: so what happens now? How markets are reacting after the shock.

43 GBP/CHF All Else Aside: Analysis of the events which are moving the cross

USD TECHNICAL OUTLOOK

19 Mid-Year Dollar view remains bullish, still in the disjointed global puzzle: Brexit exacerbates failed correlations and volatility through 2016

MONETARY POLICIES

46 “Print the Money”: Trump’s

Proposal Echoes Franklin and Lincoln

TRADING SYSTEMS

65 Exploiting Order Flow for the Discretionary Quant: outlines price inefficiencies around market structure with a basic quantitative model

COACHING

79 Trade Like a Business: two steps to increase your trading productivity

TECHNICAL ANALYSIS

32 Getting the Big Picture Using the Stages of Price Movement: having the whole chart view eliminates a lot of uncertainty in trading

71 Profit From Trapped Traders: learn how to trade breakouts and false breakouts

MARKET WATCH

60 Interview: Javier Paz, Senior

Analyst at Aite Group

COMMODITIES

35 The Supply Glut Is Over: $30 oil is no longer a possibility

TECHNICAL REPORTS

84 Currency Index:EUR-G10 index, long-termJPY-G10 index, long-term

85 Trends and Targets:USD Majors, Major CrossesEmerging & Asian MarketsUSD/CAD, EUR/NOK, EUR/RON, EUR/AUD

89 CONFERENCES & SEMINARS

INTERNATIONAL DATA

90 FX Spot Monitor91 Central Bank Rates92 Economic Data - FX Poll93 Markets View

94 ECONOMIC CALENDAR

FED SET CAUTIOUS TONE AT JUNE MEETING

28IS A REWARD TO RISK RATIO INHERENTLY BETTER THAN ANOTHER?By exploring the results of various trading scenarios you’ll learn how reward to risk ratios affect trading

FX TRADER MAGAZINE July - September 2016 3

50 FX TRADER MAGAZINE July - September 2016

Euro, ECB and Eurozone

past and upcoming challenges

Over the past decade, the European Union (EU) has faced a number of distinct economic challenges and political conf licts. These began with the financial crisis of 2008, which almost brought down the world’s financial system due to the U.S. subprime mortgage crisis and then continued with the second financial crisis due to the European sovereign debt crisis.

Although the European Central Bank (ECB) has introduced a number of monetary policy measures to regain economic growth and financial stability for the euro area, by maintaining price stability, a number of risk events made their appearance over the last year to tackle ECB’s efforts. These risk events include the EU referendum outcome, where the

UK voted to leave the European Union (52 percent – 48 percent), and the ongoing migrant crisis, as well as the review of Greece’s third bailout programme. Now, the ECB does not have to face only low inf lation, high unemployment and sluggish growth in the euro area, but also the upcoming risk events that threaten the euro area’s economic environment.

by Efthivoulos Grigoriou

FUNDAMENTAL ANALYSISFX

FX TRADER MAGAZINE July - September 2016 51

FXFUNDAMENTAL ANALYSIS

Responses to the Financial Crisis of 2008

The ECB, in response to weak growth, low inf lation and high unemployment, which occurred after the financial crisis of 2008, decided to face the economic slump by decreasing its key interest rate from 4.25 percent to 1 percent in an 8 month period and by increasing the money supply in the euro area. In addition, it launched a Quantitative Easing programme, or QE; ECB purchased 60 billion euros of covered bonds in May 2009 to provide liquidity to the market in a recessionary environment, and to stabilise some member states’ economies.

As mentioned above, these measures were created in order for the euro area to exit the recession, as well as to bring inflation back to levels in line with the ECB’s target at 2 percent. But the measures were also created to help businesses across Europe enjoy easier access to credit, to boost investments, create jobs and in turn support the overall economic growth. It’s worth noting that at that time the euro to dollar exchange rate was around 1.4000.

The Effectiveness of the First Measures

The steps that the ECB introduced and placed in action after the

financial crisis of 2008 did send the economy out of recession, at least temporarily, and brought inf lation closer to central bank’s target. The two strongest economies of the euro area, Germany and France, had a more in-depth positive effect from the measures. They recovered fast from the Global Financial Crisis and they have never fallen in recession again since then.

On the other hand, these steps failed to improve the labour market which was getting worse, surging above 10 percent in early 2010. The reason behind the short-term impact on the euro area economy as a whole was that some countries have never escaped recession or they turned to growth for only a few quarters. Greece’s and Ireland’s debt ballooned and the two governments turned to bailout in 2010, signalling the start of the euro area debt crisis.

ECB Launches €1 Trillion Rescue Plan

In December 2011, the ECB embarked on two Longer-Term Refinancing Operations (LTROs) to tackle the debt crisis. In other words, it launched two 36-month LTROs in order to support bank lending and liquidity in the euro area money market. The injection of cheap money into the economy - since the central bank’s lending rate is low – means that banks can lend more money to businesses and consumers, which can help the real economy return to growth. The first LTRO in late December 2011 gave 489 billion euros to 523 banks while the second LTRO in March 2012 allotted 530 billion euros to 800 banks. The euro to dollar exchange rate was around 1.3500 at that time.

The Struggle for Euro Area Continues

It was not over yet. Even though

Fig.1. Greece and Ireland debt in percent of GDP Source: Eurostat