Interview with Caxton FX: “The Most Successful Traders are also the Most Knowledgeable”

Today’s interview is with Richard Driver, currency analyst of Caxton FX, a provider of various foreign exchange services and oft-quoted expert on currency issues. Below, Mr. Driver explains his firm’s approach to analyzing currencies and offers some insights on specific currency pairs, among other things.

Forex Blog: Could you briefly discuss your background, insofar as it brought you into the foreign exchange market? What services does CaxtonFX provide, and what is your role within the organization?

Prior to joining Caxton FX, my career history was primarily in banking – I initially studied economics at Southampton University. My position as the resident currency analyst entails a variety of roles: I develop the ‘house view’; I am available for clients to contact via email or the phone on currency movements and outlooks; I update the trading desk on developments; and I write daily, weekly and various monthly currency reports for corporates and private clients. I also work closely with our PR team, providing analysis and commentary for media purposes. Finally, I write a daily foreign exchange blog, discussing any issues of interest.

Forex Blog: What tools do you use to analyze currencies? Do you prefer fundamental analysis, technical analysis, or a mixture of both?

Currency analysis involves a mixture of both technical and fundamental but I must admit I prefer fundamental; I find economic data and current affairs much easier to relate than six-digit numbers. The psychology of market sentiment and confidence is what I find really interesting. Having said that, you cannot provide complete analysis without access to an array of charts – support and resistance levels are key, but they are often interlinked with market psychology.

Forex Blog: From your research reports, it looks like your main focus is on the Pound Sterling. Is this due primarily to geographic accident, or does it represent a strategic choice and reflect your expertise?

Our sterling-centric reports are  representative of our client-base. As a London-based company, 99% of our transactions involve sterling, and our reports reflect that. Caxton FX has ambitious plans and we intend to expand internationally; this would transform our client base and our reports would no doubt be adapted accordingly.

Forex Blog: In your April 2011 Outlook report, you projected that both the Pound and the Euro would be weaker against the US Dollar in one month’s time. Can you explain your thought process behind this forecast?

Like many others, we were expecting the single currency to run out of steam after the ECB delivered on its rate rise promise. With currency trends so closely aligned with monetary policy, rhetoric from central bankers like King, Trichet and Bernanke has become pivotal- the inclusion or omission of just a single phrase can have a huge impact on the monthly prospects of a currency. In his ECB press conference, Trichet triggered speculation that it would soon be raising rates once again, whilst the BoE and the Fed remain in wait for growth to take a firmer footing before tightening policy. This improved the outlook for the euro and it continued to build from there.
The US recovery was looking positive just a few weeks ago but has since faltered and its growth prospects for this year have endured substantial downgrades as a result. So as well as its ongoing QEII programme, this has made the greenback very unappealing. We have also been surprised by the market’s resilience to escalating peripheral debt issues, though Greek default concerns have finally dented the euro in the past week or so. The extreme strength of the euro/dollar pairing last month, almost breaching the $1.50 mark, dragged GBP/USD with it. Sterling’s strength against the dollar certainly wasn’t a reflection of positive sentiment towards the UK economy.

Forex Blog: Which currency do you think is most undervalued at the moment, relative to the British Pound and in general?

The Chinese yuan is the most undervalued currency; it is estimated to be 40% off its fair value. Admittedly, the Peoples Bank of China is tightening policy and allowing the yuan to appreciate in a bid to contain soaring inflation levels, but it remains very cheap. The Hong Kong dollar is also very undervalued.

Forex Blog: It appears that central banks are now the largest force in forex markets. Would you agree? How do you expect changes in interest rate differentials will bear on exchange rates in the medium-term?

I’d agree; no other factor consistently holds market focus like monetary policy. Interest rate differentials only take a back seat in times of major uncertainty, such as the Japanese earthquake and nuclear crisis, the political turmoil in the MENA region, and currently the debt crisis in the eurozone. Currencies linked to higher interest rates such as the kiwi and aussie dollars, the euro and the loonie to a lesser extent, are all ‘riskier’ currencies which means any periods of risk aversion cloud interest rate driven trends. If and when this Greek debt issue fades, I expect the euro to rebound, with the ECB highly likely to raise rates in July, and at least once more before the Fed raises rates early next year.

Forex Blog: Most of my readership are American traders. With this in mind, do you think that one’s approach to analyze the forex market should depend on their home country/currency? Do you think that a Dollar-centric approach to trading is misguided?

As the world’s reserve currency the dollar is at the heart of most forex markets drivers, so a dollar-centric approach will at least be a good starting point. I suppose it depends on what is being traded, if the greenback is one side of every transaction then of course a dollar-centric approach can be forgiven. Even when looking at EUR/GBP, the strength of the dollar will be a major factor, but it would help to be a little more flexible when looking at other geographical markets. Nonetheless, given the centrality of the dollar to the currency market, you are far safer in the US taking a dollar-centric view than a British trader would be in taking a sterling-centric approach.

Forex Blog: Do you think the rise in gold and other commodities prices suggests that investors are losing faith not just in the dollar, but in fiat currencies in general? Does this notion play any role in your analytical approach or advice to clients?

There are obviously lots of factors at work here, particularly high global inflation, but I think the rise in gold and silver could well be a result of investors turning their back on the greenback and other currencies. The past few years of financial uncertainty has had a huge psychological impact on investors, and it’s natural for them to target tangible assets which are far more likely to hold their value.

Forex Blog: Is it possible to adapt some of the advice you offer your corporate clients to retail traders (for the benefit of my readers)? Given prevailing market conditions, what advice would you offer traders that are struggling to beat the market?

Research. The most successful traders I know are the most knowledgeable; not just about the forex market, but other markets like bonds, commodities and equities. For retail traders just getting in to the area, setting up a demo account will allow you to try different strategies and find out what works best for you, it might also help you to think a little clearer without the pressure of losing money!