Wednesday January 18, 2017 - 14:03:45 GMT
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The New Forex Trading Normal?
The election of Donald Trump has implications for all trading, including forex as all markets need to find a new normal. This means what worked during the Obama years may not work now. We have seen a taste of it since the start of the year, where the conventional wisdom trade (i.e. higher dollar, higher yields) has so far not worked out.
A shift in expectations away from a low growth/low inflation economy to policies encouraging higher growth/higher inflation is part of the new normal. Whether those expectations are met is for another discussion but what most seem to agree on is this year will be characterized by increased volatility and uncertainty, helped by an unpredictable president.
Another part of the new normal may depend on whether the new president continues with his favorite pastime, which is using Twitter to communicate. In a trading world where news algos react to headlines and keywords, often ignoring the substance of a report, what President-elect Trump tweets will be taken as fact even at times when they should be viewed skeptically.
One recent example is when he promised healthcare for everyone in the Obamacare replacement plan, which must have seen Republican leaders fall off their chairs in astonishment. Odds are he will temper those comments but in trading, an off the cuff tweet can have a significant and immediate impact. The point is that in a news driven trading world, an unpredictable president will add to volatility as long as he keeps communicating in his favored way.
If this is the new normal, then the risk of a tweet in the middle of the night has to be factored in as a risk. I remember a time when we would stand in front of exaggerated or illogical reactions to news but have since adapted by letting the dust settle before taking a stand. In any case, the shift to a new normal is underway and what complicates defining it is an incoming president who can be less than predictable, especially if he continues to communicate in the way he has been doing. If he curtails the tweets, then it would remove one risk from the new normal.
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Jay Meisler, founder, Global Traders Association
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