About Us
Trading
Platform & Tools
Partner with us
Help
Create an account LOG IN

Loading...
No results

Trading in a Recession 

Fusion Markets

post content image

Volatility is opportunity and there is no better time to embrace volatility than in a recession. To improve your success trading in a recession we’ve compiled a short list that will cover the historical performance of different asset classes, a look into different recessions, and strategies that could be implemented during a downturn. 

 

  • Know your markets 

   Forex 
   Stocks 
   Commodities 
   Cryptocurrencies 

  • Know your recession and recession history 

   Global Financial Crisis 
   Covid-19 

  • Strategies 

 

 

What is a Recession? 

 

Before we dive further into the markets and strategies, let’s first understand the broad strokes of a recession and what it really means. 

 

The term “recession” is generally applied when two consecutive quarters of negative GDP growth are reported, dubbed a “technical recession.” However, this can often be myopic and not encapsulate the entire economic environment. Unemployment, consumer spending, and lending accessibility are just some of the other indicators that help convey when an actual recession has occurred. Overall, there should be a general decline in overall economic activity. 
 

In the US, the National Bureau of Economic Research (NBER) is the authority in determining a recession. They define it as: “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” [1] Therefore despite the US reporting two negative quarters of growth in 2022, the Whitehouse issued a blog stating they are, in fact, not in a recession. [2] 

 

Regardless, when you see a general decline in economic activity, being prepared and able to adapt your strategy on the fly will largely determine your success as a trader when market conditions change. 


 

Business Cycle Phases

Overview of Business Cycle Phases (Source) 


So what does this means for the markets? 

 

Most know that in recession-like conditions, people become more risk-averse. We’ve seen this all throughout 2022. Risk-on assets like crypto, high-growth tech stocks, and speculative assets plummet, and safe havens currencies and assets rise. 

 

Tech Stock Declines 2021 to 2022

Selected Tech Stock Declines, Jan 2021 – Feb 2022   


BTC USD 2021 to 2022

BTC/USD Oct 2021 - July 2022 

 

In terms of forex, we’ll find that the demand for a currency will still largely be determined by the economic state of the issuing country/region. We’ll see strong economies and trusted currencies that the market believes can weather a recession rise or remain stable, and economies that are more susceptible to a severe fallout decline. 

 

Know Your Markets 

 

Most traders will not trade every market, so the first thing to understand in a recession is how your asset class has historically acted in an economic downturn. We all know that past performance is not an indication of future performance, but as the saying goes, “history doesn’t repeat, but it often rhymes,” so let’s first look at how different asset classes have historically performed. 

 

Know your markets: Forex  

 

Forex is not like other asset classes. Forex is to an economy as oil is to a car engine. It keeps the engine functioning but is not necessarily the gas that makes it go. Unlike an overall stock crash, in a recession we’ll see certain currencies shine. The main thing to look at is a country’s strength in a recession and how much it is seen as a “safe haven”. 

 

For example, in the first half of 2022, as recession fears were reaching a fever-pitch, we saw great strength in the USD. This is because most traders have greater trust in the US Dollar and confidence in the US economy, despite the US experiencing severe inflation and stagflation concerns. 

 

DXY 2021-2022

DXY Oct 2021 - Jul 2022 

 

Similarly, you’ll likely see emerging market currencies crash in a global recession as they are more vulnerable to economic downturns. This is further backed up by JP Morgan, who calculated that emerging market currencies drop by an average of 17% over a two-year period from the start of a recession. [3] Even G10 countries can be affected, as JP Morgan also estimated that the New Zealand dollar loses 7-8% in times of a recession. 


AUD USD Collapse in March 2020 Covid Recession>

 AUD/USD collapse during COVID recession (March 2020)


In terms of the strongest currencies, these have traditionally been: 


  • US Dollar 

  • Swiss Franc 

  • Japanese Yen 

  • Singapore Dollar 

 

Putting a particular spotlight on the US dollar, as the world’s default currency, we’ll often find banks buy USD when they (and companies) deleverage. We saw this already in the DXY when recession fears were very much at the forefront of the market’s mind both in 2022 and 2008. 

 

DXY 2008-2009

DXY Nov 2008 – Mar 2009 


Chart, line chart Description automatically generated

 

It’s important to note that these are broad generalisations. Each recession will have its own intricacies and market movements. At the end of the day, macroeconomic data is still king and will trump any broad-stroke generalisation. Indicators and future forecasts of metrics like balance of trade (imports/exports), currency demand, employment figures, inflation, spending behaviour, and monetary policy will all have significant effects on the strength of an economy and subsequently its currency. Remember to keep up to date will the latest news, forecasts, and figures. One way to do this is by visiting Fusion Markets’ economic calendar.  

 

For instance, we saw weeks before that energy prices were coming down due to a number of factors (Libya’s lifted embargo, OPEC+ meetings, lower demand, etc.) - energy was a major factor in the US’s rising CPI in 2022. This combined with the Fed’s less hawkish stance on rate hikes, positive job numbers, and slowing inflation saw markets rally and embrace a higher risk appetite, further exemplified by the fall of the DXY. 

 

Know your markets: Stocks 

 

Overall, we’ll generally see indices crash in a downturn. This year we saw the S&P500 fall below the 20% threshold that stock traders use to determine a “bear market”. Similarly, from 2007-2008, we saw the S&P 500 fall from 1,527 (Sept. 2007) to 968 (Sept. 2008) and the FTSE 100 drop from 6466 to 4902 over the same period.  

 

That being said, not all stocks will plummet. While “growth” stocks will be hit the hardest, you’ll notice that “defensive stocks” may actually rise during this time. For example, McDonald’s Stock rose 5.8% in Sept 2007 to Sept 2008. Similarly, we saw Coca-Cola increase revenues by 12% quarter on quarter in 2022 Q2. 

 

Fidelity created a template (below) that outlines a rough guide of how different sectors perform at different stages of the business cycle. 

 

Fidelity’s Sector Rotation Chart (Source) 


Know your markets: Commodities 

 

Obviously, gold is seen as a safe haven to many, especially during a recession and historically has thrived in risk-off conditions. However, gold is not the only commodity that may see gains. Similar to stocks where staple companies rise, we often see other popular commodities used when times are tough such as corn and wheat also rise. Reversing this assessment, we’ll also find commodities in high demand in booming economic conditions like those used in infrastructure, such as copper, fall. 

 

Similar to stocks and forex, these are all broad strokes and real-time data will trump generalisations. Ask yourself questions about how commodity markets will be affected in an economic downturn such as: are there political hold-ups (sanctions, embargoes)? How will the supply chain look (what could reduce/increase supply)? Does the commodity have new uses/markets (e.g. EVs)? 


undefined

Gold Price vs Recessionary Period 1968 - 2021 


LME Copper Future price vs Recessionary Period 1990 - 2020 


Know your markets: Crypto 

 

Crypto has not been around in a recession, so it can be difficult to determine how it will react in such conditions. However, it has been through several bear markets that can paint a telling picture of how the market behaves in a downturn. 

 

Obviously, crypto is in the basket of “risk-on” assets, so you’ll generally see falls across the board, even in deflationary crypto assets. The real question is, what kind of falls will you see? 

 

Historically, Bitcoin has been the gold standard and although it has dropped significantly in bear markets its crash has been less severe than altcoins (alternative coins) like Doge, Ada, and Stellar. Ethereum is also now considered a bluechip coin and may show the same resilience in an upcoming recession, but in the last bear market (2018 - 2020), it followed the same big crash blueprint of other altcoins, coming down from $1,396 USD to $84 at the bottom of the market. 

 

ETH/USD December 2018 – March 2019 

 

The other key factor you’ll need to consider is which altcoins have staying power. While it’s true Bitcoin will hold up better in a market downturn than altcoins, it is also true that Bitcoin will have less upside than altcoins that are able to survive through a bear market. In 2020-2021, altcoins that weathered the bear market (Ethereum included) saw mind-boggling rises that dwarfed the return of bitcoin. 

 

ADA/USD Nov 2020 - Sep 2021 

 

At the end of the day, it comes down to your risk appetite, your time horizons and your trading style. 

 

Know your history and recession 

 

What kind of recession is this and what policies are central banks enacting to soften the blow? If we look throughout history, we’ll see a variety of different recessions with varying lengths, severities and outcomes. So, while it’s important to know how asset classes generally respond, it’s also very important to know what is unique about the recession you’re experiencing.  

 

Let’s examine two past recessions. 

 

Covid-19 Recession (March 2020) 

 

The Covid-19 recession was unlike many recessions of the past due to the unique effects on supply chain, employment and the unprecedented QE response from central banks. While the markets had been on a significant bull run for some time, the downturn can only be described as abrupt and violent.  

 

Economic Declines in 2020

 

Following, central banks went into action and put the jets on stimulus and other economic incentives to keep their economy afloat. As a result, we saw unprecedented growth across risk-on assets, and assets affected by supply chain issues such as corn and timber. 

 

Coronavirus and stock market chart



Lumber prices in COVID

 

Central banks’ response also saw further economic hardships appear as inflation rose significantly, further affecting economic stability and has led to what many are predicting as a long, hard crash in the next recession. 

 

Inflation since 2020 world

 

 

Take Aways: 


  • Central Bank responses are paramount 

  • Look beyond the term “recession” - what are the actual aftermath effects of the recession-cause (e.g. lockdowns, supply restrictions, who stays employed)?  

  • How has previous market behaviour affected investor expectations and risk appetite (prior long-lasting bull market)?   

 

Great Financial Crisis/Great Recession (Dec 2007 - June 2009) 

 

The Great Financial Crisis (GFC) was a severe recession that affected economies across the globe. It was largely driven by financial deregulation in the US (repeal of Glass-Steagall) that allowed risky subprime lending and securitisation of toxic assets. As a result of the overheated mortgage-backed securities market, when the economy started to slow in 2007 it set off a chain of events that created chaos throughout the global markets, leading to global credit freezes.  

 

During this time the S&P500 fell 38.49% in 2008 (its worst year since 1937). In order to prevent a depression, governments began implementing quantitative easing (QE) policies, as well as a number of other measures to prevent further economic catastrophe. However, it still took roughly 4-5 years for the markets to fully recover. Similar to today, in the FX markets we saw USD act as a safe haven. 

 

Notable price market movements in 2008: 
 

  • DJIA -33.84% 
  • S&P500 -38.49% 
  • Gold Rallied +8.29% 
  • Oil plunged -53.5%  

 

2008 Stock market peak to recession end


Equity Index 2008 to 2009


History of Global Financial Crisis


Take Aways:

 

  • How does the recession affect lending?  

  • How did it affect consumer confidence? 

  • To what extent will central banks go to avoid severe downturns (bailouts, QE, etc.)? 

  

Embrace your strategy 


While you will be adapting your strategy in a recession, it’s still important to stick to your trading plan. Know your take profit levels, know your stop loss levels and know your time horizon. 

Are you an intraday trader or a swing trader? Can your strategy in a bull market be applied in a bear market with tweaks? Has your risk appetite changed? 

 

Let’s examine a couple of common CFD trading strategies: 

 

Hedging


Hedging is the trading strategy of mitigating your risk by taking an opposite position in the asset or related asset. As many people are often long-term stock investors, some traders may wish to offset their risk by taking an opposite position in stocks or indices. If you’re looking for a cost-effective way to implement this strategy you can use Fusion Market’s commission-free US Share CFD or Equity Indices trading. 

 

Position Trading


As you will know the market you’re trading (FX, Equities, Commodities, Crypto etc.), you’ll also have some rough ideas of where particular assets may move. Position trading is akin to buy and hold or sell and hold strategies. In that, you take a position and run with it until you hit your broader take profit or stop loss levels. 

 

Scalping


Scalping is the practice of buying and selling an asset quickly with the aim of making small and quick profits. It is often favoured by day traders. There are many scalping techniques with some even considering arbitrage as a form of scalping. Others may try to briefly catch a trend, while some traders may look to trade the asset when it is “ranging” (bouncing between clear support and resistance levels).  

 

Carry Trading


Carry trading is profiting from interest rate spreads between two currencies by borrowing in a currency with a low-interest rate and converting that to a currency with a higher interest rate. This is a popular strategy among forex traders. However, this strategy carries risks such as the currency pair you are carry trading substantially drops in value. This is why it’s important to know the latest macroeconomic data to ensure your loaned asset doesn’t break in the wrong direction.   

 

News Trading


This can be especially potent in an economic downturn as traders will be closely watching central banks and will react quickly to their decisions. For example, as inflation and recession fears were major concerns in 2022, central bank interest rate hikes had significant effects on the markets and the perceived economic outlook of a country. This type of trading can be both short or long-term, but to be successful you’ll need to know what the market already thinks. A common method for this is to look at futures data and other markets to gauge expectations. For example, you can see data on Fed fund rate futures to see what interest rate hikes the market expects from the Fed. How closely the Fed matches expectations will affect how the market moves on and after their announcement. 

 

These strategies, much like other information in this article are broad ideas, nothing is to be taken as gospel. Still, it is a useful way to get a better grasp of what happens in a recession and how to position yourself to remain profitable when the market falls. 

 

Let us know what you think and if you have any other things you believe we should have added. 

 

To be able to trade all your assets in one place with the lowest commissions forex broker, join Fusion Markets today and get access to over 250+ trading assets. With 37ms* executions and from 0.0 spreads, we’ve made trading easy. 

 

 

 

 

 

 

 

 

 

 

 

 


We’ll never share your email with third-parties. Opt-out anytime.

Relevant articles

Market Analysis
post image main
Introducing Six New Base Currencies for Forex Traders

Estimated Read Time: 15 minutes 

In an era where global markets are constantly evolving, adaptability and innovation have become the cornerstones of success. With this ethos in mind, we are pleased to announce the introduction of six new base currencies by Fusion Markets. Embracing the diversity of international finance, we are now offering traders the opportunity to engage with the Norwegian Krone (NOK), Swedish krona (SEK), Czech koruna (CZK), Hungarian forint (HUF), Swiss franc (CHF), and Danish Krone (DKK) as base currencies. 


Key Points:  

  • Fusion Markets has added six new base currencies: Norwegian Krone (NOK), Swedish Krona (SEK), Czech Koruna (CZK), Hungarian Forint (HUF), Swiss Franc (CHF), and Danish Krone (DKK). 

  • These additions aim to provide traders with more flexibility and access to a broader range of currency pairs. 

  • Each currency has a unique history and plays a significant role in its respective country's economy. 

  • The new base currencies offer opportunities for portfolio diversification and exposure to different economic regions. 

  • Traders can benefit from Fusion Markets' low commissions, zero minimum deposit, and access to multiple trading platforms. 

  • Understanding the correlations between these currencies and major global currencies is crucial for effective trading strategies. 

  • The introduction of these base currencies reflects the evolving nature of the global forex market and the importance of adapting to new opportunities.



Table of Contents

This expansion marks a significant milestone in our commitment to empowering traders with enhanced flexibility and access to a broader range of currency pairs. As the forex landscape continues to evolve, it is essential for traders to have access to a comprehensive selection of base currencies to navigate the ever-changing trends of the global economy. Let's explore their history, unique characteristics, roles, and correlations within the global financial ecosystem.

By registering with Fusion Markets, you will get access to: 

  • $0 minimum deposit 

  • No minimum account size 

  • White glove customer support 

  • Range of markets (including Forex and our new base currencies) 

  • TradingView, MetaTrader 4, MetaTrader 5, cTrader 

 

TRADE NOW 


Norwegian Krone (NOK)


The Norwegian Krone, denoted by the symbol "kr" and the currency code NOK, has been in circulation since 1875 when Norway joined the Scandinavian Monetary Union. Like many currencies, the Krone is subdivided into smaller units, known as øre, with 100 øre equaling 1 Krone. While Norway initially pegged its currency to gold, it later adopted a floating exchange rate regime, allowing market forces to determine its value. 

 

Historical Background of the Norwegian Krone 


The initial introduction of the krone occurred in 1875 as it replaced the speciedaler. At that time, the exchange rate was set at four kroner for one speciedaler. Subsequently, Norway became a part of the Scandinavian Monetary Union, a coalition that remained in existence until the outbreak of World War I. Throughout the Union's existence, the Norwegian krone adhered to the gold standard until 1931 when it was pegged to the British pound. 


In 1939, Norway's currency was linked to the U.S. dollar (USD). However, during the German occupation of Norway in World War II, it was tied to the Reichsmark. Following the war's conclusion, the currency was once again pegged, this time to the British pound (GBP). Shortly afterward, the krone's peg shifted to the US dollar until 1971 when it was allowed to float freely in the market for seven years before being linked to a basket of currencies. Then, in 1992, the central bank opted to move away from a fixed exchange rate system, enabling the currency to float based on foreign exchange rates. 

 

Correlations of the NOK 


The Norwegian krone ranks as the 14th most traded currency globally by value and exhibits a strong correlation with other currencies. Its value against major counterparts such as the US dollar and euro experiences significant fluctuations from year to year, primarily influenced by shifts in interest rates and global oil prices. 


Even long after the dissolution of the Scandinavian Monetary Union, the Krone maintains a notable correlation with the Danish krone and the Swedish krona. Conversely, its correlation with currencies like the British pound, euro, Canadian dollar, and others tied to oil prices remains comparatively low. Notably, some establishments in Oslo, Norway’s capital city, accept payments in US dollars or euros for goods and services. 


As a prominent oil exporter in Western Europe, Norway derives a substantial portion of its budget from oil revenues. Consequently, the value of the krone is closely intertwined with fluctuations in crude oil prices, reflecting trends in the global oil market. 


For instance, during the oil crisis of 2015, the krone depreciated by 20% against the dollar, marking its lowest level in a five-month period from October 2014 to February 2015. To learn more about other top Forex events in the new millennium, visit our blog. 



Swedish Krona (SEK)


The Swedish krona, symbolised as "kr" or "SEK," serves as the national currency of Sweden. With a rich history established in 1873, replacing the Swedish riksdaler as Sweden joined the Scandinavian Monetary Union, the SEK is renowned for its resilience and stability. 


Sweden's export-oriented economy, characterised by industries such as automotive, engineering, and telecommunications, heavily influences the SEK's performance. Furthermore, the SEK's correlation with global economic trends and monetary policies makes it an attractive option for traders seeking exposure to the broader European market. 

 

Historical Background of the Swedish krona 

The origins of the Swedish krona can be traced back to the 17th century when Sweden transitioned from the silver standard to a bimetallic monetary system. Over the centuries, the krona evolved, experiencing fluctuations in value, and undergoing reforms to adapt to changing economic conditions. 


In 1873, Sweden joined the gold-standard-based Scandinavian Monetary Union, pegging the krona to gold. Subsequently, Sweden embraced a floating exchange rate regime, allowing the krona's value to be determined by market forces. 

 

Correlations of the SEK 


The Swedish krona (SEK) exhibits correlations with various currencies, with some of the notable ones including: 


  • Euro (EUR): Given the proximity and extensive trade relations between Sweden and the Eurozone countries, particularly Germany, the Swedish krona often shows a significant correlation with the euro. 

  • Norwegian krone (NOK): As neighbouring countries with intertwined economies, Sweden and Norway often experience correlated movements in their respective currencies, the Swedish krona, and the Norwegian krone. 

  • Danish krone (DKK): Similarly, Sweden's proximity to Denmark and their shared economic ties can result in correlations between the Swedish krona and the Danish krone. 

  • US Dollar (USD): The US dollar is a major global reserve currency and a key player in international financial markets, so movements in the USD can influence the Swedish krona's exchange rate. 

  • British Pound (GBP): While not as strong as some of the other correlations mentioned, the Swedish krona may also exhibit some level of correlation with the British pound, particularly due to trade relations and economic ties between Sweden and the United Kingdom. 

 



Czech Koruna (CZK)


The Czech koruna, represented by the symbol "Kč" or "CZK," is the official currency of the Czech Republic. Emerging as a key player in Central Europe's economic landscape, the CZK embodies the region's transition towards a dynamic market economy. 


With a focus on manufacturing, automotive, and technology sectors, the Czech Republic's export-driven economy shapes the CZK's performance. Traders eyeing opportunities in Eastern Europe will find the CZK a compelling addition to their forex portfolios. 

 

Historical Background of the Czech Koruna 


Since February 8, 1993, the Czech koruna has served as the official currency of the Czech Republic, replacing the Czechoslovak koruna following the dissolution of Soviet Czechoslovakia into independent Czech and Slovak republics. Both the Czech koruna and the Slovak koruna (SKK) were introduced at par value in lieu of the Czechoslovak koruna. 


Despite joining the EU in 2004, the Czech Republic has not yet adopted the euro (EUR) as its official currency. Nevertheless, the nation remains in preparations to transition to the common currency, albeit without an official target date for implementation. Originally, the Czech Republic aimed to adopt the euro in 2012, but opposition led to the postponement of this move following a 2007 vote. 

 

Correlations of the CZK

 

The Czech koruna (CZK) exhibits correlations with various currencies, with some of the notable ones including: 

 

  • Euro (EUR): Given the geographical proximity and economic ties between the Czech Republic and the Eurozone countries, particularly Germany, the Czech koruna often shows a significant correlation with the euro. 

  • US Dollar (USD): As one of the world's primary reserve currencies and a key player in global financial markets, movements in the US dollar often influence the Czech koruna's exchange rate. 

  • Polish złoty (PLN): Due to Poland's proximity to the Czech Republic and the significant trade relations between the two countries, there tends to be a correlation between the Czech koruna and the Polish złoty. 


Hungarian Forint (HUF)

  • The Hungarian forint, being another currency from a neighbouring country in Central Europe, may also exhibit correlation with the Czech koruna due to shared economic factors and trade relations. 

  • Slovak koruna (SKK): Historically, before Slovakia adopted the euro, the Slovak koruna maintained a correlation with the Czech koruna due to their shared history and close economic ties as part of the former Czechoslovakia. 

 

These correlations may vary over time and can be influenced by factors such as economic conditions, trade relations, geopolitical events, and monetary policies of respective countries. Traders and analysts often monitor these correlations to gain insights into potential trends and movements in the Czech koruna's exchange rate. 

 

The Czech Republic's Approach to the Euro 


Concerns stemming from the European debt crisis stand as a primary factor driving resistance to the Czech Republic's full integration into the Eurozone and the adoption of the euro as its official currency. While eventual euro adoption is anticipated for the Czech Republic, recent discourse has also entertained the notion of the nation's potential departure from the European Union altogether. 


Termed 'Czech-Out' or 'Czexit' by the media and some political analysts, this concept parallels Brexit, depicting a scenario where the Czech Republic exits the European Union entirely. Although Czech President Miloš Zeman does not endorse the idea of EU departure, he has expressed openness to holding a referendum, allowing citizens to vote on the matter, similar to the process undertaken by the U.K. in June 2016. 


Despite these discussions, the Czech Republic boasts a relatively robust economy within the EU. It exhibits one of the highest Gross Domestic Product (GDP) growth rates and among the lowest unemployment rates, standing at approximately 2.9% in 2019, with inflation hovering around 2.8%. While unemployment experienced a modest increase in 2020, it settled at 3.8% as of November 2020. 

 

Hungarian Forint (HUF):

 


The Hungarian forint, denoted by the symbol "Ft" or "HUF," stands as the official currency of Hungary. Rooted in a rich tapestry of history and culture, the HUF reflects Hungary's economic resilience and dynamism. As a prominent player in Central and Eastern Europe, Hungary's diverse economy encompasses industries such as automotive, manufacturing, and agriculture. The HUF's correlation with regional economic developments and monetary policies offers traders a gateway to the vibrant markets of Eastern Europe. 

 

Historical Background of the Hungarian Forint  

The Hungarian forint saw its initial usage between 1868 and 1892, but it wasn't until 1946 that the modern forint was officially introduced, with the aim of stabilising the national economy in the aftermath of World War II. The currency derives its name from the gold coins of Florence known as fiorino d'oro, minted from 1252 onwards and widely circulated throughout the Austro-Hungarian Empire. 

 

While the forint's exchange rate has displayed some level of stability, uncertainties within the nation's economy have adversely impacted its value in the foreign exchange market. For instance: 

 

  • The acceptance of the Treaty of Trianon in 1920 following World War I had profound repercussions on the Hungarian economy, marked by the loss of over 70% of its pre-war territory and more than 60% of its pre-war population. Five of Hungary's ten largest cities prior to World War I were absorbed by neighbouring countries. This, coupled with war reparations and the erosion of its tax base, led to a significant devaluation of the HUF, with annualised inflation peaking at nearly 1,200% in 1923. 

  • In the late 1980s and early 1990s, Hungary, along with several other central and Eastern European nations, transitioned away from communist rule, prompted by economic stagnation and inflation. The transition, though challenging, was peaceful. Hyperinflation soared to 35% during the 1990s as Hungary embraced a market economy. Although the economy showed signs of improvement in the 2000s, rampant inflation undermined the currency's convertibility. 

  • Hungary's export-oriented economy heavily relies on a skilled labour force. Key trading partners include Germany, Slovakia, Italy, Romania, and Austria. Notable industries encompass car manufacturing, production of car parts, and manufacturing components for radios and televisions. 

 

According to World Bank data, Hungary reported a -4.7% contraction in gross domestic product (GDP) in 2020 and a 5.1% inflation rate in 2021. This downturn primarily stemmed from the economic repercussions of the global COVID-19 pandemic. 

 

Correlations of the HUF 


The Hungarian forint (HUF) exhibits correlations with various currencies, including: 

 

  • Euro (EUR): Given Hungary's geographical proximity to the Eurozone and its extensive trade relations with Eurozone countries, particularly Germany, the Hungarian forint often shows a significant correlation with the euro. 

  • Polish złoty (PLN): Poland and Hungary have significant trade relations, but Poland does not share a direct border with Hungary. Therefore, the Hungarian forint may exhibit correlation with the Polish złoty. 

  • Czech koruna (CZK): Similar to Poland, the Czech Republic shares a border with Hungary, and there are considerable trade ties between the two countries, potentially leading to correlations between the Hungarian forint and the Czech koruna. 

  • Romanian leu (RON): Romania is another neighbouring country to Hungary, and while the economic ties may not be as extensive as with Poland or the Czech Republic, there can still be correlations between the Hungarian forint and the Romanian leu. 

  • US Dollar (USD): The US dollar is a major global reserve currency, and movements in the USD can influence the Hungarian forint's exchange rate, especially during times of global economic uncertainty. 

 



Swiss Franc (CHF)


The Swiss franc, symbolised as "CHF," holds a revered status as a safe-haven currency and a bastion of stability in the global financial landscape. Renowned for Switzerland's tradition of neutrality, fiscal prudence, and financial sophistication, the CHF embodies the quintessential attributes of a haven asset. Switzerland's thriving banking sector, precision engineering, and pharmaceutical industries underpin the CHF's allure as a currency of choice for investors seeking refuge during times of uncertainty. 

 

Historical background of the Swiss franc 


Until 1798, approximately 75 entities within Switzerland were engaged in coin minting activities, resulting in the circulation of 860 distinct types of currency featuring varying denominations, weights, and monetary systems. Among these currencies were thalers originating from cities such as Bern, Basel, Zurich, and Geneva. 


In 1798, the Helvetic Republic introduced a new monetary framework, anchored by the Berne thaler, equivalent to six grams and three-quarters of pure silver. This currency, known as the franc, remained in circulation until the dissolution of the Helvetic Republic in 1803 but continued to serve as the basis for currencies utilised by several member states of the Reformed Swiss Confederation. 


In 1848, with the adoption of the new Swiss Federal Constitution, the exclusive authority to issue currency within the country was granted to the federal government. The initial federal monetary legislation, enacted on May 7, 1850, by the Federal Assembly, established the franc as the official monetary unit of Switzerland. Concurrently, both the Swiss franc and the French franc were introduced into circulation. 


The establishment of the Latin Monetary Union between 1865 and the 1920s, comprising Switzerland, France, Belgium, and Italy, further intertwined the Swiss franc's value with those of its counterparts. Under this union, the currencies of all four nations were pegged to the value of silver. Additionally, the Swiss franc was incorporated into the Bretton Woods exchange rate system following World War II, a framework that persisted until the early 1970s. Notably, until 1999, the exchange rate of the Swiss franc was tied to the price of gold. 

 

Factors Influencing the Swiss Franc (CHF) 


  • Swiss National Bank and Monetary Policy 


The Swiss National Bank (SNB) serves as Switzerland's central bank, entrusted with the responsibility of formulating monetary policy and managing exchange rates. Unlike some central banks, the Swiss National Bank does rely on a specific policy rate, previously the Libor target range, to regulate monetary conditions. Previously, it utilised FX swaps and repurchase agreements to influence both the money supply and interest rates. To bolster liquidity, the Bank engages in purchasing US dollars (or other foreign currencies) against Swiss francs. SNB officials wield the ability to impact the Swiss franc through their statements and commentary concerning the currency, liquidity, and monetary matters. Any alterations in monetary policy have consequential effects on the currency. 


  • Macroeconomic Indicators 

A plethora of economic indicators relating to Switzerland's economy and market, including inflation, employment data, GDP rates, and industrial production, exert influence on the Swiss franc. 


  • Cross-Exchange Rates 

Fluctuations in non-dollar exchange rates or cross-exchange rates can influence the USD/CHF pairing. Fluctuations in non-dollar exchange rates or cross-exchange rates such as GBP/CHF may not have a significant or predictable impact on USD/CHF, due to the weaker correlation between the British pound and the Swiss franc. 


  • Positive Correlation with the Euro 

The Swiss franc exhibits a positive correlation with the euro, owing to the close economic ties between Switzerland and the Eurozone, particularly Germany. This correlation is notably apparent in the inverse relationship between the USD/CHF and EUR/USD pairs. When the EUR/USD experiences sharp movements upwards or downwards, the USD/CHF reacts correspondingly but inversely, consistently moving in the opposite direction. 

 


Danish Krone (DKK)


Danish Krone, represented by the symbol "kr" or "DKK," serves as the official currency of Denmark, Greenland, and the Faroe Islands. As a stalwart of Scandinavian prosperity and innovation, the DKK reflects Denmark's enviable track record of economic stability and social welfare. Denmark's diversified economy, encompassing industries such as renewable energy, shipping, and agriculture, shapes the DKK's performance. Moreover, Denmark's commitment to prudent fiscal policies and sound governance enhances the DKK's appeal as a reliable currency for international traders. 

 

Historical Background of the Danish Krone 

 

A timeline with purple dots and a plane Description automatically generated with medium confidence 

The history of coin production and usage in Denmark spans numerous centuries, with organised minting activities dating back to as early as the 10th century. The earliest official Danish coins were established on the Carolingian silver standard, a system of silver currency introduced in France during the era of Charlemagne, aiming to replace the gold coinage of the Roman Empire. This silver-based monetary system, consisting of pennies, shillings, and pounds, eventually became the foundation for the British pound sterling in Great Britain. 


Regrettably, Danish monarchs, like many rulers of their time, pursued practices of periodically debasing their currency by reducing the actual silver content in minted coins, leading to multiple remonetisations in attempts to restore public trust in the nation's monetary system. One significant event in this regard was the inception of the current Danish krone in 1875. 


The introduction of the krone coincided with a period when transactions involving coins were becoming increasingly cumbersome, prompting a transition towards greater reliance on printed banknotes alongside the implementation of the new currency. 


Denmark made several endeavours to fix its currency to the gold standard, but ultimately abandoned this endeavour in 1931, coinciding with Great Britain's decision to depart from the gold standard in the same year. During Denmark's occupation by Germany in World War II, the Danish krone was temporarily linked to the German Reichsmark, followed by a peg to the British pound in the immediate postwar era. 


Presently, the krone is pegged to the euro under the European Exchange Rate Mechanism (ERM) II, a mechanism aimed at curbing excessive volatility in the euro's exchange rate with European trading partners. Over recent decades, Denmark has contemplated joining the eurozone and adopting the euro as its official currency. However, the most recent public referendum in 2000 narrowly rejected this proposition by a margin of 53% to 47%. 


 

The Danish Krone in Forex Trading 


The Danish Kroner (DKK) holds a distinctive position within the realm of Forex trading, presenting opportunities and perspectives that are indispensable for traders seeking success in navigating the global currency market. Serving as the official currency of a nation renowned for its stable economy, high living standards, and robust financial systems, the DKK serves as a conduit for comprehending the Scandinavian financial landscape. 


  • Stability and Security: 

Denmark's economic stability finds manifestation in its currency, rendering the DKK a preferred asset for traders seeking safe-haven investments amid periods of global economic uncertainty. The nation's strong fiscal policies, minimal inflation rate, and transparent governance contribute to the stability of the Kroner, instilling a sense of confidence in Forex traders. 


  • Diversification: 

Engaging in DKK trading enables investors to diversify their currency portfolios, spreading risk and accessing markets characterised by lower volatility. The DKK's correlation with major currencies like the Euro and the US Dollar equips traders with strategic alternatives, empowering them to make informed decisions aligned with global economic trends. 


  • Insight into the Scandinavian Market: 

Understanding the DKK is essential for traders interested in the Scandinavian region, as the currency serves as a bellwether for the area's economic well-being. It furnishes valuable insights into market dynamics, investment prospects, and potential risks prevalent in the region. 


  • Trading Strategies: 

Forex traders can leverage the stability and regional significance of the DKK to formulate tailored trading strategies. Whether engaging in carry trades, utilising the currency for hedging purposes, or capitalising on its low volatility for short-term gains, the DKK offers a spectrum of opportunities suitable for both novice and seasoned traders. 


 

Correlations of the DKK 


The Danish krone (DKK) exhibits correlations with various currencies, including: 

 

  • Euro (EUR): Given Denmark's proximity to the Eurozone and its extensive trade relations with Eurozone countries, particularly Germany, the Danish krone often shows a significant correlation with the euro. 

  • Swedish krona (SEK): Denmark shares a border with Sweden, and both countries have significant trade relations. Therefore, the Danish krone may exhibit correlation with the Swedish krona. 

  • Norwegian krone (NOK): Norway is another neighbouring country to Denmark, and while the economic ties may not be as extensive as with Sweden, there can still be correlations between the Danish krone and the Norwegian krone. 

  • British Pound (GBP): While there may be some level of correlation between the Danish krone and the British pound, the correlation is generally weak. The Danish krone is more heavily influenced by the Euro due to Denmark's ERM II peg. 

  • US Dollar (USD): The US dollar is a major global reserve currency, and movements in the USD can influence the Danish krone's exchange rate, especially during times of global economic uncertainty. 

 

Conclusion



In conclusion, the introduction of these six new base currencies underscores our dedication to providing traders with unparalleled opportunities to diversify their portfolios and capitalise on emerging market trends. Whether it's harnessing the resilience of the Norwegian Krone, navigating the intricacies of the Swiss franc's safe-haven status, or tapping into the dynamic economies of Central and Eastern Europe, our expanded offering opens doors to a world of possibilities in forex trading.  


For further insights into currency pairs and the foreign exchange market, register with Fusion Markets to stay updated on all the latest macroeconomic developments. 

 

 

 


12/11/2024
Market Analysis
post image main
Separating Hype from Reality in Algorithmic Trading 
Read Time: 6 Minutes


The integration of Artificial Intelligence (AI) in forex trading is reshaping the landscape of financial markets. With the potential to analyse vast data sets and execute trades at incredible speeds, AI offers exciting possibilities. However, traders must navigate the hype and understand the practical realities of AI's capabilities and limitations in the dynamic forex environment.



Table of Contents


  1. Introduction
  2. The Promise of AI in Forex
  3. Current Realities of AI in Forex
  4. Common Misconceptions
  5. AI vs. Human Traders
  6. The Future of AI in Forex
  7. Final Thoughts



Introduction


Artificial Intelligence (AI) is revolutionising many industries, and forex trading is no exception. It’s estimated that AI-driven trading could reach US$19 billion in revenue by 2028.


According to the International Monetary Fund (IMF); “the share of AI content in patent applications related to algorithmic trading has risen from 19 percent in 2017 to over 50 percent each year since 2020, suggesting a wave of innovation is coming in this area.”





Although this may be exciting at first, every trader must be sure to distinguish between the hype, and reality.


AI is still evolving, and its application to the forex market is not yet foolproof. AI should be considered as a tool, rather than a solution to guaranteed profits. Although AI can process data incredibly quickly, human discretion is still a pivotal aspect of trading.


The Promise of AI in Forex


AI promises to bring numerous benefits to forex trading, often by outperforming humans in specific areas;


  • Enhanced Data Analysis: AI can analyse vast amounts of data in real-time, much quicker than any human ever could. It can quickly identify patterns across multiple currency pairs, interest rates, and economic indicators, something that would take human traders hours, if not, days.


  • Faster Trade Execution: In high-frequency trading (HFT), speed is everything. AI algorithms execute trades in milliseconds based on pre-set criteria, enabling traders to capture small, short-term price movements before the competition even reacts.


  • Emotion-Free Decision Making: Emotion and trading don’t mix - often leading to costly mistakes. AI removes the element of fear, greed, or hesitation, making decisions purely based on data and predefined algorithms. This is especially beneficial in volatile markets where emotional discipline is paramount.



Current Realities of AI in Forex


While the promises are enticing, the reality of AI in forex is far more complex. AI may have seen success in niche areas like high-frequency trading (HFT) and pattern recognition.


However, AI has significant limitations and challenges that traders must be aware of:


  • Data Dependency: AI is only as good as the data it’s given. Poor data quality or biased historical data can lead to incorrect predictions. This is why many AI models fail during black swan events that disrupt the market, such as the 2020 pandemic.


  • Complexity in Adapting to Market Conditions: AI excels in stable or predictable environments but struggles in a chaotic environment that poses many unforeseen disruptions and volatility. The most recent example, the 2020 Covid-19 pandemic, many institutions had become accustomed to.


As an example, financial institutions have been known to use AI algorithms to exploit small price discrepancies across different markets, leading to some great successes. However, when the 2020 Covid-19 pandemic disrupted markets, AI struggled to adapt to the rapidly changing conditions and, in some cases, leading to large losses for the institutions running them.


For more insights on how AI is evolving in forex trading, you can check out this detailed post on Fusion Markets, where the use of AI tools like ChatGPT is discussed in the context of market analysis and trading strategies.



Common Misconceptions About AI in Forex


There’s no shortage of misconceptions about AI's role in forex trading;


  • "Set it and forget it" myth: Many traders believe AI can be programmed once and left to generate profits indefinitely. This is far from reality. AI algorithms require constant monitoring, updating, and recalibration to keep pace with the ever-changing dynamics of the market.


  • AI guarantees profits: Some traders fall for the myth that AI trading guarantees profits. However, no system—AI or otherwise—can ensure consistent profits. Forex markets are affected by too many unpredictable factors, such as global politics, economic crises, and even natural disasters, for any system to be foolproof.


  • AI can predict black swan events: Despite all its power, AI cannot predict rare, unpredictable events like black swans. These events, by their nature, fall outside the scope of traditional data patterns and are difficult for AI to forecast.



AI vs. Human: A Balanced Comparison





AI and human traders bring different strengths to the table, and understanding these distinctions is key to developing a robust, and successful, trading strategy.


  • AI’s Strengths: AI excels at processing massive amounts of data, identifying subtle market patterns, and executing trades with precision and speed. It removes human biases and can operate 24/7 without fatigue.


  • Human Trader’s Strengths: On the other hand, human traders excel in areas where AI currently struggles—especially in understanding the broader context behind market movements. Human intuition, experience, and the ability to adapt to unpredictable events are areas where traders can outperform AI. For instance, human traders can weigh the political implications of an unexpected event, such as Brexit, where AI on the other hand might struggle to incorporate in real-time decision-making.


A hybrid approach that combines AI’s strengths with human insight may be the best way forward. AI can manage data processing and execution, while human traders focus on strategy, risk management, and adjusting for unforeseen market conditions.



The Future of AI in Forex


It’s still early days for AI in forex trading, but it’s rapidly evolving. Emerging technologies such as Natural Language Processing (NLP) and quantum computing are expected to transform AI's role in the financial markets further.


  • NLP: This allows AI systems to interpret news articles, social media sentiment, and other forms of unstructured data that can influence market movements. For example, NLP can be used to gauge how a new economic policy or geopolitical event may impact currency pairs.


  • Quantum Computing: While still theoretical in many applications, quantum computing holds the potential to perform complex calculations much faster than traditional computers. This could give AI even greater predictive power in markets where speed and computational capacity are crucial.



Our Final Thoughts


AI has undeniably transformed many industries, including the forex market. Whilst it can enhance data analysis, execution speed, and remove emotional biases, it’s no holy grail. The best approach is to employ AI with a balanced perspective—recognising its limitations whilst leveraging its strengths to complement your own trading strategies.


In short, AI is a powerful tool, but not a guarantee of success. The key to successful AI-driven trading lies in combining human intuition with algorithmic precision – we, as traders, must keep an eye on these trends but always remain cautious about relying on AI-driven systems.


Happy Trading

29/10/2024
Ready to Start Trading?
Get started live or get a free demo
GET A LIVE ACCOUNT OR TRY A FREE DEMO