While we almost always rely on a set of core tenets to guide our strategic approach, there are times in our trading lives that qualitative considerations become slightly more important.
President-elect Donald Trump made a lot of shocking statements during his campaign, and for traders, those comments relating to the financial industry, the economy, and international trade now possess added gravity.
Looking back on recent history, the global economy suffered an extreme shock during the 2008-2009 Financial Crisis and central banks around the world embarked on an epic journey of supportive actions and policies to ensure a safe landing for the world economy.
These actions saw interest rates in many countries drop precipitously, and in some cases fall below zero (i.e. NIRP: Negative Interest Rate Policy). Quantitative easing was also a component of this support, which involves central banks purchasing assets from financial institutions in order to help reflate prices.
Although we've stepped back from the brink of financial calamity, economic growth around the world has remained fairly stagnant, and central bankers have maintained a dovish stance.
The perceived fragility of the world's economic order is one reason that Donald Trump's ongoing comments are being monitored so closely. While the Federal Reserve largely controls monetary policy in the United States, the President has extensive influence over foreign affairs, including international trade.
It's widely expected that the Federal Reserve will raise interest rates a quarter percent at their upcoming meeting on December 14th. While this may not seem like a significant change, it's likely that the US Dollar will strengthen alongside rates.
As the Dollar becomes more valuable versus foreign currencies, that means goods exported from the United States become relatively more expensive. One would assume that companies based in the United States with revenues highly levered to international sales would eventually feel some negative impact from these changes if the trend were to continue (unless other foreign governments begin raising their own rates).
If the United States pulled out of (or attempted to re-negotiate) international trade agreements against a backdrop of rising rates, things could get even more challenging for American exporters.
Given the above considerations, it's easy to see why interest rates at home and abroad, foreign exchange rates, and international trade will be so important to monitor during the Trump administration.
tastytrade live will of course be reporting on, and analyzing, important developments in these areas and their potential impact on portfolio risk management.
One such piece, from the Futures Measures series, may be of interest to those looking for more information on global interest rates and foreign currency trading.
The episode focuses on the Fisher Effect - a theory in international finance that suggests differences in nominal interest rates of different countries reflect expected changes in spot exchange rates between those countries.
For example, if Country X has a nominal interest rate of 6%, and country Z has a nominal interest rate of 3%, the Fisher Effect hypothesizes that the currency of country Z should appreciate roughly 3% as compared to country X.
The reason for this relationship (according to international finance theory) is that inflation in the country with higher nominal interest rates will also be higher, causing the currency of that country to depreciate against the country with lower interest rates (and lower levels of inflation).
Given the complexity of this topic, we hope you'll take the time to watch the entire episode of Futures Measures when your schedule allows.
If have any questions relating to interest rates and/or foreign currency trading we hope you'll reach out at firstname.lastname@example.org.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.