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Armada Markets, a global spot Forex and precious metals broker for professional traders notifies its clients to be cautious in their trading decisions as the period of record low volatility is about to end. Higher volatility will increase risks for all traders and Armada Markets advises its clients to reduce risks.

The notice is triggered by yesterday's release of Bank of England and Federal Reserve minutes of their last policy-setting meetings in which both central banks raised the possibility of a sooner than anticipated rate rise. In recent years most market participants have become overly comfortable with the low interest rate environment and should now revisit their risk management strategies. Changes in interest rate outlook and ultimately the rise of interest rates should bring and end to the low-volatility environment and introduce higher risk to the market.

All financial markets including FX, stocks and commodities have seen volatility indices hiting record lows in recent weeks as the low interest rate environment has created the illusion that markets can only move in one direction.

Various volatility indices at historicallows including JP Morgan G7 Volatility Index

Why traders care about volatility?

Investors look at various volatility indices due to following main reasons:

• Higher volatility means more risks
• Higher volatility introduces also more opportunities for traders as market tends to fluctuate more and by a larger extent
• Some trading algorithms work only with low volatility while others need high volatility
• Risk management techniques need to be adjusted based on the changes in market volatility
• Higher volatility introduces more emotional stress for any trader
• In a higher volatility environment historical correlations between various currency pairs tend to experience short-term deviations

Armada Markets alerts regularly its clients on major shifts in market dynamics or outlook. Armada Markets is proud to be the top choice for professional spot FX and gold/silver traders providing them with:

• Industry-lowest spreads with average EUR/USD spread of 0.3 pips
• Industry-lowest retail commissions of 20 USD per million
• Ultra-fast trade execution speed of 300 milliseconds on Metatrader4 platform
• Trading environment where all types of strategies including news trading, scalping and arbitrage are allowed

Data Sources

Forex Article : Record Low Volatility on Forex Markets About to End

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ECB Hires Blackrock for Advice on ABS-Buying - Will it Work?

We learned today that the European Central Bank (ECB) hired the US-based BlackRock Inc., the world’s biggest money manager, to advise on developing a program to buy asset-backed securities or ABS in short. ECB thinks that this program will save eurozone from deflationary pressures and boost the economic activity.

What is ABS?

Asset-backed securities (ABS) are usually a pool of small and illiquid assets which are unable to be sold individually. The pools of underlying assets can include common payments from credit cards, auto loans, and mortgage loans. Why banks use ABS is to sell some of their more illiquid assets and thereby free up some of their capital to be able to offer more credit. So in a sense it is a normal cycle in banking.
What it this means for the Eurozone is that instead of previously focusing on supporting the government bond markets and especially avoiding the periphery (Greece, Italy, Spain, etc) bond yields going to levels unaffordable, the ECB is now planning to start buying corporate debt. The idea is to free up capital for the banks, liquify the corporate bond market and therefore improve the credit flow for companies and boost the economy.

Where ECB sees problems?

Let's have a look at bank loans in Eurozone. In the chart below you clearly see one problem - despite all of the (statistically unproven) hype about economic recovery in the Eurozone, bank lending to private sector has been on a gradual decline. It has not recovered post-2008 crisis. The decline in bank lending is the main reason why ECB likes to talk about deflationary risks.
When companies do not borrow, they don't make any investments into new capacity or products which in turn means they require less people to work. This is also the reason why we still see high unemployment rates across Eurozone except Germany. When talking about unemployment data we recommend our readers focus on labor force participation rates instead of official unemployment rates. You'd be surprised why!

Do the companies really need more debt?

The strong growth we experienced in industrial production starting from 2009 has long ended. In fact the recent data indicates that we are currently on a decline. It is in decline because the consumers don't demand so many products. So why would companies need more financing if they already operate at below average capacity utilization rates and in light of the current turmoil around Ukraine (and the inconfidence it creates among consumers) it is very unlikely that consumers will suddenly want to buy another iPhone or a brand new car. Consumers are focused on pure necessities such as food and shelter.

What is wrong with the European consumers?

If you look at any unofficial inflation data then you will discover that inflation in Eurozone is much higher than you get to read from the official statistics. Add to this the negative real salary growth and you kind of get the feeling that consumers are not feeling very optimistic about the future. They know that prices will tend to move higher whereas their salaries have not been raised that much. So, consumers look to cut back on their spending. The want to save.
The reason why real inflation is high is due to the aggressive liquidity boosts coupled with ZIRP (NIRP in Eurozone) that most G7 central banks have engaged with since 2008. This liquidity has found its way to stock market, commodities market and in turn to products in our refrigirators. It has paralyzed the consumer as this liquidity boost has not boosted their real incomes.

Will the purchasing of ABS work?

Unfortunately, we think that it will not work because the Eurozone companies do not require additional financing at circumstances which we have explained. The companies need the end demand to pick up. But for that we need a stable socio-economic and political situation in Eurozone and around.
Post 2008 crisis a lot of issues that needed to be resolved are still unsolved. Some of these issues are here:

• Most Eurozone governments still run large budget deficits as limited efforts have been taken to improve government efficencies and budget structures
• Eurozone debt/GDP figures haven't improved - they have become worse which has worsened also future borrowing capacity of most countries
• Banks haven't been recapitalized and zombie banks still exist

Russian sanctions

Recent Russian sanctions to ban imports of certain agricultural products from European Union will have a severe impact on European agricultural industry. For the European consumers it will at first be quite pleasant - products unsold to Russia will oversupply the local market and will lower the food prices. It will generate a certain feeling of relief among working class members of the society which make up majority of the population.
The lower food prices and overcapacity will ultimately start bankrupting European agricultural and food processing industry and will drastically lower supply. Once the reduction in supply will take its course we will have a massive inflationary pressure which will at the same time lower the purchasing power of majority of Europeans. Lower purchasing power will ultimately start to affect other industries and Europe will fall into another severe economic crisis.
We hope that these scenarios will not take place although we admit that this would be a bit naive. What it all means for the FX markets is that volatility will pick up (we touched this topic in our recent post here: Alert: Record Low Volatility on Forex Markets About to End) over the coming months and higher volatility will mean more trading opportunities but also more risk.

Forex trading for smart traders: www.armadamarkets.com

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September started on Forex markets with a big bang. We saw mini-crash in EUR/USD and GBP/USD. Dollar is back guys but for how long?

Trade volatile markets: Armada Markets | ECN Forex Broker | Forex trading

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Where Will Ukraine Get Gas for Winter?

As European Union is introducing new sanctions against Russia which this time will target also oil and gas industry Russia's permanent representative to the EU Chizhov had this to say: "New EU sanctions against Russia leave Russia no other choice but to go for certain counter-measures.

We leave politics for the politicians but an interesting chart we came across today is the average monthly temperatures in Kyiv, Ukraine. As both sides announce or threaten with sanctions Ukraine is actually experiencing declining temperatures outside (and soon at home if the situation is going to get much worse). Where is Ukraine going to buy gas this Winter?

How this affects FX markets? First of all USD/RUB hit record highs today as Russian rubble is under pressure. Rubble is likely to continue weakening over the coming weeks as there is no resolution in sight. Also, while EUR/USD has found some support in recent days it has not been able to climb above the key 1.3000 and should we close this week below that level then we could be up for a further downside. Euro has currently key support level at 1.2750.

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