How to Position Your FX For G10

Per the Commodity Futures Trading Commission's (CFTC) most recent ,data, some currency positions have undergone sudden shifts. The euro saw a drop of 5 percent of o  pen interest, the pound declined 10 percent, but the New Zealand dollar shifted to a net long position, gaining 32 percent of open interest. Other “pro-cyclical” currencies saw similar shifts.

However, based on recent events such as the ,Russia-Ukraine crisis, CFTC data may not be enough to explain the current changes in world currencies to empower traders for FX hedging. This is particularly important for those conscious about ensuring their trades are within the G10. Let’s examine this topic more closely and evaluate how you can position your trades this way.

Understanding the Group of Ten (G10)

The G10 is one of five “group of” groups, such as the Groups of 7, 8, 20, or 24. This congregation consists of eleven industrialised nations that often meet (annually or more) to consult, debate, and cooperate on international financial matters, where decisions are made regarding the economy and the exchange of currency and market data.

The member countries are:

• Belgium

• Canada

• France

• Germany

• Italy

• Japan

• The Netherlands

• Sweden

• Switzerland (which plays a minor role)

• The United Kingdom

• The United States

G10 currencies are one of the most liquid pairs in FX hedging. Thus, traders can buy or sell them without significantly impacting their exchange rates. These currencies are:

• Australian dollar (AUD)

• Canadian dollar (CAD)

• Euro (EUR)

• Japanese yen (JPY)

• New Zealand dollar (NZD)

• Pound sterling (GBP)

• Norwegian krone (NOK)

• Swedish krona (SEK)

• Swiss franc (CHF)

• United States dollar (USD)

Their Similarities

The G10 “group” is composed of the wealthiest members of the International Monetary Fund (,IMF) who fully agreed to the General Agreements to Borrow (GAB). They are an internal group that provides funding for the IMF’s usage. Thus, the G10 meets once a year (or more often) to discuss, debate, and cooperate on its members' financial matters.

This economic consortium is one of five groups that make up a more extensive family called the Group of Twenty (G20). Composed of various nations, the other groups are the G7, G8 and G24.

The G10’s Connection to Current Events

The price of G10 currency pairs took a hiatus in early March, but they continued to be volatile due to ongoing global conflicts. The UK banned ,Russian fossil fuels, but it spared natural gas and coal. This news caused G10 currency pairs to recover from their recent downturn and improve FX hedging.

Meanwhile, due to Russian forces intensifying their ,bombardment of Ukraine’s capital city, Kyiv, Over 1.2 million Ukrainians fled to Poland and other countries. Due to international sanctions, the Russian stock market trading halt was extended to keep prices from tumbling. Meanwhile, trading just reopened with the Russian ruble. As of this month, it is at an all-time low.

Meanwhile, Fitch Ratings has ,mused that a default on the country's debt is "almost inevitable" because of the financial isolation. In contrast, major companies like Starbucks have joined the steady stream of companies suspending operations or withdrawing from the country entirely.

There was some positive movement among the G10 currencies in early March. The euro and the Swedish krona were the worst performers since the start of the war, but they also recovered some ground against the U.S. dollar.

Meanwhile, the franc and Australian dollar were among the worst performers. The euro responded positively to the news flow; meanwhile, the ,EU is set to unveil a plan this week that would allow them to issue bonds on a potentially massive scale to finance energy and defence spending as they cope with the fallout from Russia’s invasion of Ukraine.

On Thursday, European leaders will probably hold an informal ,summit in Versailles, France, to formally discuss Ukraine’s EU membership. Tightening the spread on government bonds reduced the cost of borrowing for peripheral nations, at least in the short term, and the euro climbed 1.09 to complete a 2.2 percent recovery from a two-week low. An economic-stimulus program by the EU may help to improve the region's morale and focus on recovery. This response is good news for the euro, as it should help bolster confidence in the European project, just as it did when the COVID-19 pandemic hit Europe in 2020.

Additionally, fiscal stimuli may help ease the consequences of the war in Ukraine. The spike in energy prices and the likelihood of a long-lasting war still pose significant downsides for the Euro. Still, the Euro reacted positively after the announcement. While no one expects it to trigger a considerable rebound for the EUR–USD currency pair, it should help lower the downside potential over the short term.

While Stable, the USD Is Now Highly Volatile

Recent ,data available from the CFTC indicated a marginal increase in the dollar’s net aggregate positioning against reported G10 currencies (excluding the Norwegian krone and the Swedish krona) during the week of March 15. However, the developed market currencies showed unusual and extreme volatility in their positioning gauges.

The euro and the pound sterling dropped, likely mirroring the impact of the Ukrainian conflict with some delay. Shares of currency pairs between those two currencies showed a boost in net positioning (+5 percent of open interest). At the same time, the euro remained marginally into net-long territory (+3 percent of open interest).

The pound registered a considerable ,drop in net positioning (-10 percent of open interest) and reached levels last seen in January this year. We have seen multiple examples of large weekly swings in pound positioning over the past two years, often offset entirely in the following week, so we caution against reading too much into this move concerning FX hedging.

Economic Fluctuations

While the Yen underperformed other currencies, long positions in the Canadian Dollar, Australian Dollar and New Zealand Dollar increased in the week of ,March 5, as supply and demand line up better. While the Kiwi dollar's positioning remained oversold, it improved supply and demand from the week before. This is reflected in an increase of 32 percent of open interest for these positions. Meanwhile, a delay after the Yen moves is also reflected.

The net positioning on the CAD and AUD ,rose but at a slower pace. AUD net positioning was still more than 36 percent short despite rising more than 2.5 percent in the last month. We suspect that the current market positioning on the AUD isn't as skewed to short as it was previously.

The most recent — and significant — adjustments in FX positioning revealed in CFTC ,data and the tendency to display market moves with some delay (even of multiple weeks) suggests that this tool has likely lost some explanatory power. This could be due to the unusual FX volatility generated by the conflict in Ukraine, which resulted in a sizeable net-long position for its largest trading partner, Russia.

Causes for GG10 Currency Movement

The volatility of the foreign exchange markets, which is the tendency of currency prices to fluctuate rapidly, can provide traders with benefits, including the potential for increased profit, but can also come with increased risk. This makes it essential to learn what moves foreign exchange markets to get the best results.

To do this, traders can identify what has caused price fluctuations in the past. By identifying what has caused price fluctuations in the past and current trends and patterns, traders can forecast future price movements for FX hedging.

These are the factors traders watch out for in currency price shifts, so they position their FX hedging in the G10:

• Central banks: Central banks control their countries’ base interest rates, and their decisions frequently trigger large movements across several currency pairs. By understanding and predicting how future interest rate hikes or decreases will affect the global economy, speculators can predict which direction a given currency pair will go.

When a central bank raises its base interest rate, investors take this as a sign that the country’s economy is improving and currency will hike. For instance, between 2002 and 2005, the central bank of New Zealand increased its rates ,four times, while Japan kept its rates ,low; in response, the New Zealand dollar rallied against the Japanese yen as investors preferred to ,invest in New Zealand over Japan.

As the most heavily traded ,currency globally, any interest rate changes by the United States Federal Reserve will impact all significant G10 currency pairs. Both sterling and the euro have been the most sensitive G10 currencies to the USD interest rate increase.

• Commodity costs: Some G10 currencies are linked to the prices of everyday items. Thus, it is natural for some currencies to be correlated with commodity prices because their economic growth is directly related to exported or imported goods. Take the following examples:

• The Australian dollar is usually correlated with the price of minerals such as ,gold and copper. ,Australia is the world's second-largest producer of gold and the fourth largest copper producer, so any changes in the demand for gold or copper will affect the health of its economy.

• Similarly, the Canadian dollar is oil-linked because Canada is a ,net oil exporter. As such, any decline in oil prices will affect its economic performance.

• Japan's yen is also commonly linked to oil because it's a ,net importer; any improvement in oil prices will help Japan’s economy. The CAD/JPY pairing is susceptible to exaggerated price movements based on this relationship.

• Many commodity prices are sensitive to developments in China – although it’s classified among emerging markets (EM) currencies, it's one of the ,largest importing nations and an ,economic superpower. Any improvement in China's economy has contributed to increased demand for commodities, and thus for exports from exporting nations – such as Australia and Canada – which can cause these pairs to increase in value relative to other pairs.

However, if China’s economy slows down and commodity prices ,fall, G10 currencies linked to commodities will suffer the most.

• Economic crises: Even if some currencies are historically associated with global growth, such as the British pound, other exchange rates are not. Economic downturns tend to hit most currencies hard.

Still, when investors are worried, they turn to ,‘safe-haven’ currencies such as the Japanese yen and the Swiss franc, which appreciate during an economic slowdown. Investors often turn to these currencies because of the stability of their governments and financial systems.

In addition, because the Swiss government is independent of the rest of the European Union, investors often turn to the Swiss franc when they are worried about Europe’s economy.

• Publication of economic data: One example of economic data impacting a G10 currency is the euro, which has historically ,surged on eurozone high growth numbers and the eurozone’s lowest unemployment levels since the financial crisis of 2008.

Norway has seen significant ,price moves due to its inflation reports. In contrast, Australia’s gross domestic product (GDP) and employment data releases have created more substantial ,price moves in the Australian dollar than some US data releases have caused the US dollar.

Economic data releases of larger G10 currency nations can also cause price movement across their ranks. For instance, the US non-farm payrolls (NFP) data release often causes ,immediate changes to G10 currency pairs such as EUR–USD.

• Political context: Recently, G10 currencies have seen volatility, with their values constantly changing because of political uncertainty in the countries that use them. Forex is traded in pairs, meaning the value of a currency is based on the exchange rate of another currency.

For example, the impact of Brexit on the ,value of the pound sterling has been severe and long-lasting. It will be difficult for the sterling to reach its former value without political stability. However, it has remained one of the best performing G10 currencies because many major partners are also experiencing political uncertainty.

Last ,January 2018, the US dollar was one of the weakest G10 currencies. Predictions that interest rates would rise and positive economic data were not enough to keep up the dollar's value; instead, political turmoil caused by US President Donald Trump’s decisions on US immigration led to further losses in the value of the currency. Meanwhile, ,political uncertainty in Europe made it hard for the euro to hold onto its value. The weakened US dollar values and the euro helped the sterling make relative gains.

Gain the Upper Hand in FX Hedging

While a mountain of information to digest, this general overview of macroeconomics will help you position FX for G10 currencies. Remember to watch out for all five factors to ensure informed, positive trades.

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