Chapter 19
Fundamental Trading Strategy: Macro Event Driven Trade

Short-term traders are generally focused only on the economic release of the week and how it will impact their day trading activities. This works well for many traders, but it is also important not to lose sight of the big macro events that may be brewing in the economy or the world for that matter. Large-scale macroeconomic events will move markets and will move them in very big ways. Their impact goes beyond a simple one- or two-day price change because depending on their size and scope, these occurrences have the potential to reshape the fundamental perception toward a currency for months or even years at a time. Events such as wars, political uncertainly, natural disasters, and major international meetings or monetary policy changes are so potent due to their irregularity that they can have widespread psychological and physical impacts on the currency market. With these events come both currencies that appreciate vastly and currencies that depreciate just as dramatically. Therefore, keeping on top of global developments, understanding the underlying direction of market sentiment before and after these events occur and anticipating them could be very profitable, or at least can help prevent significant losses.

Know When Big Events Occur: Here Is a List of a Few Important Ones

  • Significant G7 finance ministers meetings
  • Presidential elections
  • Important summits
  • Major Central Bank meetings
  • Potential changes to currency regimes
  • Possible debt defaults by large countries
  • Possible wars as a result of rising geopolitical tensions
  • Federal Reserve chairman's semiannual testimony on economy

The best way to highlight the significance of these events is look at a few notable macroeconomic examples from the past two decades.

2014 Ukraine–Russia Crisis

The 2014 Ukraine–Russia crisis was one of the biggest geopolitical events of the past decade. The crisis began in 2013 but didn't really hit its peak until March 2014 when Russia signed a bill to absorb Crimea. Leading up to the announcement, the uncertainty put significant pressure on the EURUSD in January 2014 with the currency pair dropping sharply on March 18, 2014, the day that Russia declared that Crimea was now officially apart of their country. This led to a few more weeks of downward pressure for the EURUSD as shown in Figure 19.1 as investors awaited the world's response. Many nations declared their support for Ukraine and war was feared, but eventually Russia was only hit with sanctions, and a few months later, the Ukraine crisis moved to the back burner.

Candlestick chart depicting EURUSD Ukraine crisis, with arrows pointing downward trends from December 2014 to January 2015 and on March 2015.

Figure 19.1 EURUSD Ukraine Crisis

Source: eSignal

European Sovereign Debt Crisis (2009–2013)

The European Sovereign Debt Crisis started in 2009 and lasted into 2013 with the bulk of the damage being done by February 2012. It was a multiyear debt crisis that was sparked by the inability of many member nations to meet their debt obligations after the global financial crisis. Their banking sectors and economies suffered significant losses, and persistently negative growth prospects made it impossible for countries such as Greece, Ireland, Portugal, and Cyprus to repay or refinance their government debt. Between 2010 and 2012, all of these nations required bailouts or some form of support from the Troika, composed of the ECB, IMF and European Commission. While the problems were concentrated in smaller Eurozone nations, there was fear of contagion for the major economies. The country of Spain did not require a bailout but in 2012, a number of banks required additional funding. The crisis posed caused significant volatility for the euro. Figure 19.2 shows two long periods of EURUSD weakness that were caused by bailouts, downgrades, and other negative headlines.

Candlestick chart depicting EURUSD sovereign debt crisis displaying downward arrows from late 2009 to mid 2010 and from early 2011 to 2012 depicting two long periods of EURUSD weakness.

Figure 19.2 EURUSD Sovereign Debt Crisis

Source: eSignal

Global Financial Crisis (2007–2009), Subprime

One of the most important macroeconomic events of the twenty-first century was the 2007 to 2009 subprime/global financial crisis. It was triggered by a sharp slide in house prices, default on mortgages, and blowup of subprime mortgage backed securities and collateralized debt obligations. This, in turn, caused massive losses for banks and financial institutions, leading the failure of major firms such as Lehman Brothers, Merrill Lynch, and Bear Stearns. The impact on the financial market and the economy was staggering, with many countries falling into recession. During this period, the stock market lost more than 50% of its value with the S&P 500, falling from a high of 1,565 in October 2007 to a low of 676 in March 2009. As shown in Figure 19.3, USDJPY dropped from a high of 116.47 in October 2007 to a low of 87.13 in January 2009. This was only the beginning of a multiyear decline for the currency pair. EURUSD had a delayed reaction, rallying strongly between October 2007 and April 2008 as money flowed out of the U.S. economy, and then falling sharply between July 2008 and October 2008 as the risk aversion and crisis spread to Europe.

Candlestick chart depicting USDJPY global financial crisis displaying a downward arrow from early 2007 to 2010 depicting the multiyear decline in USDJPY.

Figure 19.3 USDJPY Global Financial Crisis

Source: eSignal

Political Uncertainty: 2004 U.S. Presidential Election

Another example of major events impacting the currency market is the 2004 U.S. presidential elections. In general, political instability causes perceived weakness in currencies. The hotly contested presidential election in November of 2004, combined with the differences in the candidates' stance on the growing budget deficit, resulted in overall dollar bearishness. The sentiment was exacerbated even further, given the lack of international support for the incumbent President (Bush) due to the administration's decision to overthrow Saddam Hussein. As a result, in the three weeks leading up to the election, the euro rose 600 pips against the U.S. dollar. This can be seen in Figure 19.4. With a Bush victory becoming increasingly clear and later confirmed, the dollar sold off against the majors as the market looked ahead to what would probably end up being the maintenance of status quo. On the day following the election, the EURUSD rose another 200 pips and then continued to rise an additional 700 pips before peaking out six weeks later. This entire move took place over the course of two months, which may seem like an eternity for many, but this macroeconomic event really shaped the markets and for those who were following it, big profits could have been made. However, this is important even for short-term traders because given that the market was bearish dollars in general leading up to the U.S. presidential election, a more prudent trade would be to look for opportunities to buy the EURUSD on dips rather than trying sell rallies and look for tops.

Candlestick chart displaying lines depicting the rise of euro before 2004 election night with 600 pips and after the election night with 700 pips.

Figure 19.4 EURUSD Election Trade

Source: eSignal

G7 Meeting Dubai September 2003

The G7 finance ministers meeting on September 22, 2003, was a very important turning point for the markets. The dollar collapsed significantly following the meeting at which the G7 finance ministers wanted to see “more flexibility in exchange rates.” Despite the rather tame nature of these words, the market interpreted this line to be a major shift in policy. The last time changes to this degree had been made was back in 2000. Taking a step back, the countries that constitute the G7 are the United States, United Kingdom, Japan, Canada, Italy, Germany, and France. Collectively, these countries account for two-thirds of the world's total economic output. Not all G7 meetings are important. The only time the market really hones in on the G7 finance ministers meeting is when they expect big changes to be made to the statement. In 2000, the market paid particular attention to the upcoming meeting because there was strong intervention in the EURUSD the day before the meeting. The meeting in September 2003 was also important because the U.S. trade deficit was ballooning and becoming a huge issue. The EURUSD bore the brunt of the dollar depreciation while Japan and China were intervening aggressively in their currencies. As a result, it was widely expected that the G7 finance ministers as a whole would issue a statement that was highly critical of Japan and China's intervention policies. Leading up to the meeting, the U.S. dollar had already begun to sell off as indicated by the chart. At the time of the announcement, the EURUSD shot up 150 pips. Though this initial move was not very substantial, between September 2003 and February 2004(which was the next G7 meeting), the dollar fell 8% on a trade-weighted basis, 9% against the British pound, 11% against the euro, 7% against the yen, and 1.5% against the Canadian dollar. To put the percentages into perspective, a move of 11% is equivalent to approximately 1100 pips. Therefore, the longer-term impact is much more significant than the immediate impact as the event itself has the significance to change the overall sentiment in the market. Figure 19.5 is a weekly chart of the EURUSD that illustrates how the currency pair performed following the September 22, 2003 G7 meeting.

Candlestick chart displaying lines depicting the rise of euro (percent) after G7 meeting in September 22, 2003: 14% rally from September 2003 to January 2004 and 6% from February to December 2004.

Figure 19.5 EURUSD G7 Meeting

Source: eSignal

U.S. War Against Iraq

Geopolitical risks such as wars can also have a pronounced impact on the currency market. Figure 19.6 shows that between December 2002 and February 2003, the dollar depreciated 9% against the Swiss franc (USDCHF) in the months leading up to war. The dollar sold off because the war itself was incredibly unpopular among the international community. The Swiss franc was one of the primary beneficiaries due to the country's political neutrality and safe-haven status. Between February and March, traders began to believe that the inevitable war would turn into a quick and decisive U.S. victory, so they began to unwind the war trade. This eventually led to a 3% rally in USDCHF as investors exited their short dollar positions.

Candlestick chart displaying that dollar depreciated 9% against the Swiss franc (USDCHF) in the months leading up to war.

Figure 19.6 USDCHF Iraq War

Source: eSignal

Each of these events caused large-scale movements in the currency market. Such events are clearly important to follow for all types of traders. Keeping abreast of broad macroeconomic events can help traders make smarter decisions and prevent them from fading large factors that may be brewing in the background. Most of these events are talked about, debated, and anticipated many months in advance by economists, currency analysts, and the international community in general.