Devaluation, oil-induced crisis are new opportunities for forex traders, says Ahmad

Mr. Jameel Ahmad is the Chief Market Analyst at the Cyprus-based ForexTime Limited- the parent company of ForexTime Nigeria, which provides access to the global currency market and offers trading in forex, precious metals, among others. In this interview with CHIJIOKE NELSON, he explains economic implications of the crude oil volatility on the global foreign exchange trading and outlook for Nigerian traders. Excerpts.

THE global economy’s growth forecast seems to be moving back and forth. What is the effect of this on foreign exchange trading?

POLICYMAKERS from major central banks had warned us that there has been a divergence of economic sentiment between the major economies since the summer and as we entered the final stages of 2014, we saw this remain in focus. In fact, the divergence over both economic sentiment and monetary policy between major economies is widening even further and we have only just entered 2015. This is increasing market volatility, where the major winner has been the USD. The US economy has continued to carry the torch and lead the race in the global economic recovery, and this has seen the USD continue to strengthen against its counterparts.

  Market volatility means that there is more movement in the forex market, leading to more opportunities for both profits and losses. In terms of how this market volatility has played out in real trading terms, traders are switching on to this clear divergence, which has so far seen the EURUSD fall from 1.39 to 1.17 with many still predicting further declines. Other central banks are also paying attention to global economic headwinds, such as the Bank of England (BoE) who are now pushing away previous pressure to raise UK interest rates. This has really reduced investor attraction towards the Pound, and been a major catalyst behind the GBPUSD dropping from 1.70 to 1.50 in just a few months. Recent comments from the Royal Bank of Canada (RBC) confirming the drop in oil prices being negative for its economy will also have some impact on global growth prospects, with the impact on foreign exchange trade being the USDCAD jumping from 1.15 to 1.18 in just over a month.

Do you think global foreign exchange trading is insulated from the falling crude oil prices?

Global foreign exchange trading is by no means insulated from the falling crude oil prices. In fact, it is highly affected by it. However unlike with other more traditional investment vehicles, a commodity does not have to be strengthening in order for the investor to make a profit. Even in a situation where a currency or commodity price is crashing, a trader hasjust as much opportunity to make a profit as a loss, because he is able to trade against it. Therefore being affected by the falling crude oil prices is not necessarily a bad thing.

  The falling prices of oil have led to an extremely unexpected period of volatility in the global foreign exchange market. This has been an exciting period for traders because with the right level of education, market knowledge and understanding of the relevant risks, there have been some fantastic trading opportunities which involved opportunities for profits, but also involved opportunities for losses. A lot of attention has been focused on the economies that are directly impacted by the decline in oil prices, therefore Brazil, Venezuela, Russia and Norway have been in the headlines.

  However, the lower oil prices are expected to lead to a short-term inflation decline globally and this spells trouble for central banks already combatting low inflation levels, such as the European Central Bank (ECB) and Bank of Japan (BoJ). Japan is one of the economies that in the longer term will benefit from lower oil prices because it imports a high quantity of the commodity, however this can’t be said for Europe. The ECB are going to face even more intense pressure to introduce further stimulus, which points towards the Euro possibly continuing to trade in a bearish direction. 

  We are also looking at the prospect of lower inflation levels further encouraging a neutral stance against raising interest rates from the Bank of England (BoE) and Royal Bank of Canada (RBC), which could result in limited investor attraction towards the Pound and Canadian Dollar.

What forex distortions are likely for most oil producing countries?

We are looking at the heightened prospect for many oil producing countries to enter an unexpectedperiod of weaker economic growth, due to the fall in oil prices and the reduced income of the country from this phenomenon. This might lead to various central banks attempting to devalue their currency in an attempt to reinvigorate economic growth, so it is possible the interest rate adjustments we have recently seen from Norway and Russia might become a trend and this would increase market volatility.

What would you prescribe for Nigeria as leeway to the crude oil-induced crisis it is currently undergoing?

Some patience is required. We don’t quite yet know how adversely impacted the Nigerian economy is going to be, and we likely will not until at least a few months into 2015. There are also no signs of a floor being found in the oil markets yet, therefore it might not be until prices stabilize that we can consistently judge how the Nigerian economy is reacting. 

Do you support the country’s devaluation programme? Why?

Yes. In some ways the central bank acted proactively and attempted to devalue the Naira before the drop in oil prices even began. This has resulted in the Naira only depreciating by around 15 per cent against the United States dollar this year, despite the Nigerian economy being very dependent on oil trade.

  Other central banks acted differently when fears arose before the drop in oil prices, and began to create concerns over how this will impact their economies. Only last month, the Norwegian Central Bank were forced to unexpectedly cut interest rates after the plummet in oil prices began and this led to the Norwegian Krone weakening to its lowest level since August 2001 against the USD. As the drop in oil prices continues, it remains possible that the Norwegian Central Bank will be forced into further interest rate cuts in the future. The Russian Central Bank (RCB) is another example of a central bank reacting after the oil prices had already dropped considerably. On the morning of December 16, the RCB unexpectedly hiked interest rates overnight from 10.5 per cent to 17 per cent and this sent a shiver of shocks among investors. The move was made in an attempt to strengthen the Ruble but it backfired to such a degree that the Ruble weakened by over 20 per cent to a historic low in just over a few hours.

  It appears that Nigeria is has gradually devalued the naira and by doing so, it will not alarm investors unexpectedly.

How do you think the naira devaluation will play out in the forex trading in Nigeria?

The devaluation of the naira is offering an opportunity to see increased weakness with the currency, however traders could look to diversify their portfolio by keeping an eye out for opportunities elsewhere. For example, the Naira is not the only currency that has devalued since the decline in the oil markets commenced.

  As mentioned above, the naira is not the only currency that is devaluing following the drop in oil, with weaknesses seen elsewhere as well. There is also increased evidence of diverging monetary policy between the central banks, which is promoting further market volatility. Demand for the USD is increasing due to the awareness that the Federal Reserve look to be only months away from raising interest rates, while the euro is suffering great weakness because of suspicions that the European Central Bank are going to be forced into further easing. There are other currencies that are suffering from a lack of attraction, like the GBP, because the Bank of England’s (BoE) view on inflation is becoming increasingly dovish, with this continuing to push back interest rate expectations.

What strategies are there for forex traders to remain in winning ways?

There is no one trick to trading success in the forex market but there are some key skills that can really help to boost an individual’s trading. The most important skill is discipline; all investors need a strategic plan, but it’s arguably even more important to have the discipline to follow your plan.

  Likewise, being educated is vital and having a strong work ethic comes into play here. You need to do your homework on the markets, know what can trigger price fluctuations andanalyse future opportunities. At the same time it’s important to put your ego aside and recognise when you’re wrong. Sometimes the price action is telling you that your trade is wrong and you need to have the strength to close the position and take the loss before it gets worse. All traders lose at some point and those who don’t recognise when to throw in the towel stand to lose much more. 

  And finally, patience. Patience is something you need in abundance in order to be a profitable trader. Not only do you need to wait for the ideal opportunity to trade, you must then remain patient until that trade becomes profitable before you close it out. 

How competitive is global forex trading?

Although investing in the forex market is primarily an individual pursuit, the introduction of social trading has led to the creation of communities of traders where there is something of a competitive atmosphere. However, you can choose whether you want to be a part of such communities or to trade privately for your own benefit. The forex market is by far the most liquid of all the financial markets, with more than $5.3 trillion traded internationally each day. The sheer size of the market means that, regardless of the competitive environment, there are always opportunities to benefit.

Why is it still difficult for many to penetrate into forex trading business?

The currency market is one of the fastest growing financial markets in Nigeria, but there are some common misconceptions about how to become a successful trader. 

Like any new pursuit, it takes time and practice to become a competent trader and you need to apply dedication to the learning that is required to be successful. If you were taking up tennis for the first time in your life you wouldn’t expect to become Roger Federer overnight; the same applies to forex trading. You need to understand what moves the markets, be able to recognize strong buy and sell signals, how to set and stick to a successful trading strategy and how to use appropriate risk management controls in order to truly succeed. 

  It is not difficult to get involved in the forex trading business, but it’s important you spend the time learning and practicing. One of the primary reasons that FXTM organizes regular free educational events and seminars is that we recognize that a knowledgeable trader is a profitable trader and this is our ultimate goal for all of our clients. Anyone new to forex or interested in learning more should consider coming along and learning from our qualified experts.

What plans do you have to broaden forex trading knowledge in the country?

We run a series of regular events such as our Traders Empowerment series – conferences that take place all across the country – which are very popular and we intend to continue these in 2015.

  We will also be hosting the inaugural FXTM Lagos Online Trading and Investment Conference on April 17 and 18, 2015.  This will be a two day event featuring lectures and workshops that will explain the basics of forex trading, what you need to know to get started in trading forex, and some of the best strategies for becoming a top trader.  Forex experts will also guide participants through detailed lessons on how to prepare a comprehensive trading plan, including explaining how to interpret charts, technical analysis and market indicators.