Hedging Against Volatility in Currency Markets

Hedging Against Volatility in Currency Markets

Volatility is a measure of market risk. It is otherwise known as the investor fear gauge, or VIX. What is particularly interesting about the volatility S&P 500 (VIX) is its sharp decline since the November 8 presidential election. At that time, it was well above 22, and it has declined by 21.10% since October. Currently, the US economy is on the cusp of a major fiscal stimulus. President-elect, Donald Trump has vowed a massive infrastructure plan that is geared towards rebuilding, refurbishing and upgrading roads, highways, train stations, schools, bridges, airports and the like.h

These ambitious initiatives are major drivers of economic stimulus. Already analysts are talking about a spike in the price of copper, iron ore, coal, natural gas, shipping stocks, et al. The reason for all the excitement in equities markets is that Trump’s unconventional macroeconomic approach is in stark contrast to the policies of all presidents since Ronald Reagan was elected in the 1980s. Trump is a hybrid Republican, since the policies he espouses are a fusion of commonsense market economics, massive fiscal stimulus, and America first. The CBOE volatility index is the foundation of many volatility products. Contrary to popular opinion, it is not based on stock prices, it is based on options prices – notably the S&P 500 index.

Dow Jones Industrial Average Inches Ever Closer Towards the Elusive 20,000 Level

For traders and investors, this is a period of uncertainty. The Dow Jones Industrial Average has risen sharply since the November 8 presidential election. Is currently trading at 19,933.81, up 0.07%, or 14.93 points. As that Friday, 23 December 2016, the 30-member index had 17 members up and 12 members down. The year-to-date return for the Dow Jones is 14.40%, and the 1-year return is 16.65%. During October and November, the index seesawed, but resumed its upward climb towards the end of the trading week. Nobody anticipated the surprise bullishness that markets have been experiencing since Trump’s shock election victory. In retrospect, the media and talking heads got it all wrong.

The mood of the people had been ignored and this ultimately allowed Donald Trump to trounce Hillary Clinton on November 8. The US economy is in an interim period right now, what with the transition from the Obama administration to the Trump administration. With Trump’s inauguration set to take place in January, analysts are expecting the Dow, NASDAQ and S&P 500 index to continue their bullish movements. The Dow Jones is trading well above its 50-day moving average of 18,904.12, and its 200-day moving average of 18,247.55. The sharp upward trajectory of these moving averages will soon catch up with the Dow which appears to have flattened out over the holiday season.

A Stronger Dollar Is Not Necessarily Good News for the US Economy or the Global Economy

If the USD continues to strengthen, US exports will flounder. Protectionist trade measures are economically ill-advised, since they create inefficiency in market operation. Nonetheless, it may be a necessary action to stimulate American economic growth. Now, we are seeing upbeat sentiment in markets because of the prospect of tax cuts. Recall that Donald Trump promised to slash corporate taxes to 15% across the board, and to overhaul the entire US tax code. Wall Street may not publicly come out in favour of these comments, but evidence of their sentiment is seen in stock market activity. This is an especially exciting time for traders, because there is a lot of volatility in currency markets, equities markets and indices markets. Currently, the GBP/USD pair is trading at 1.2285, down 0.0025%, the USD/JPY pair is trading at 117.153, down 0.14% or 0.167 Japanese yen, and the EUR/USD pair is trading at 1.0455, ever closer to parity.

Investing in Currency Fluctuations

Conventional investment advice is sketchy at best at this time. There is no tried and trusted set of rules to guide investors in a transitionary period, but traders certainly have tools available to them. One such option is speculative trades on financial assets. Various online trading platforms are available, but only some binary options brokers are recommended for such trades. These call/put options have been around since the 2008 global financial crisis, and were in fact brought on by the market crash at the time. Now, traders needn’t invest all their proverbial eggs in the stock market and wait for prices to appreciate – it’s possible to trade the market’s direction, not its actual price movements. With current trends, going long on the USD seems a safe option for binary options traders, but economic shocks are an ever-present reality that currency traders have to contend with.

By Alexander Slavchev
With an allround knowledge of the financial markets, I've covered European and American markets for years - providing detailed technical and fundamental analysis of the forex markets.

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