We love FX, it’s our favourite asset class. It is the only market that continued to function properly all the way through the crisis we had in 2007-09 and will likely be again as the globe is buffeted by oncoming headwinds. But it is a market not for the faint hearted or part timers.
We are really committed to helping people and investors better understand what is happening in markets and economics. That’s why we write this blog. Well, apart from the fact that we really enjoy the thought process and the writing.
It is with this in mind that we believe the Japanese intervention the other day proves once again the point made by Andrew Haldane (see blog below http://spotlight-onmarketsandeconomics.blogspot.com/2010/09/mr-markets-impatience-is-sending-wrong.html ) about the shortening of holding periods for assets.
Indeed the explosion in FX trade that is feed by margin brokers offering leverage of up to 100:1 is just another example of this short term approach and the self-reinforcement that short term holding periods beget short term trading strategies and short term traders. As many investors found in the stock market collapse in the GFC trading on leverage is a double edged sword. We’re sure that a few speculators and day traders got seriously burnt in USD/JPY’s run up to 85 from 83 in the space of a few minutes the other day. This Hourly chart from Bloomberg shows how sharp the move was.
While the Japanese intervention was the first in 5 or 6 years it wasn’t the only time we have seen these types of moves highlighting the risks in FX. The beauty of FX is that you can trade both sides of the market normally with equal ease of entry and exit 24 hours a day 5 and a half days a week. This is not the case in equities or bonds although it is probably the case with exchange traded futures, when they are open. But the key point that we would make is that trading FX is both fun and profitable but you have to be very careful at the margin and on how thin a margin you trade.
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