It was a bumpy ride for the global economy in the past few years, as unexpected events have reshaped the economic landscape and changed the outlook for interest rates, inflation, and various economic and financial aspects. It’s almost certain that the next year will likely see weaker economic growth, lower inflation, and probably the end of the rate hikes era. The recession is around the corner, the US economy is now aching from high-interest rates and the European economy is contracting. On the other hand, Asian economies are heading toward growth.
Retail Forex trading has grown significantly, with trading volumes on the global foreign exchange market reaching an all-time high despite increased volatility, BIS reports. The BIS reported that transactions in April increased by 14% from the same month last year, reaching $7.5 trillion. It is expected that the forex market size in 2022 will reach a new milestone. According to analysts, lower transaction costs, an increase in online accessibility, as well as the growth of mobile trading, have all contributed to this growth.
Main Points: • Inflation in most advanced countries hit multi-decade highs pushed by energy prices and geopolitical tensions. • To curb soaring prices, central banks such as the Federal Reserve have increased interest rates aggressively, weighing on economic growth as well. •The Russian-Ukrainian had an outsized negative impact on the global economy this year - and is likely to continue in 2023. • The US dollar has risen to new highs against other currencies, such as the euro and yen, and continues to be the dominant currency in 2022. • Daily trading volume in OTC foreign exchange markets hit $7.5 trillion this year, up 14%, compared to $6.6 trillion recorded three years earlier. • The US dollar remained the world's top traded currency with a dominant share of more than 88% of all global trades. • Chinese renminbi which recorded the biggest increase becoming the fifth most traded currency. • Emerging markets have experienced strong growth across the board, some of them are holding up relatively well and are expected to outperform developed markets in the near future. • AI and Automated Trading Systems can be thought of as the future of forex trading with many benefits for forex traders as technology advancements keep coming in. • Cryptocurrencies have seen one of the biggest tumbles in prices over the years, Bitcoin is now trading nearly 80% lower than its peak. • The Bankruptcy of FTX and Blockfi shakes the crypto credibility and drives cash flows away. • Traders and investors are more concerned with inflation hedging, as inflation becomes a major concern for everyone in 2022 as the recession is around the corner.
Market Trends in 2022
If there’s one term that has caught everyone’s attention the most in 2022, perhaps it’s ‘inflation’.
In response to her question regarding whether the world is in for a recession, the Managing Director of the International Monetary Fund Kristalina Georgieva said: “Inflation has proven to be much stubborner than we had expected it to be as a consequence of a triple crisis – a pandemic, war, and cost-of-living crisis – which drives inflation by increasing compensation demands from its end.”
Inflation Hits a Multi-Decade high in 2022
Most advanced economies in the G7 group have experienced multi-decade highs in consumer prices, though they remain below the peak of the 1970s when there were two major oil shocks. Two-thirds of 29 countries (69%) have high or very high inflation compared to their 50-year trends. In September 2022, 79 percent of countries experienced consumer price index (CPI) inflation rates above 6%, the highest levels since 2008, when the financial crisis hit the global economy.
The UK has seen its highest consumer price inflation level in more than 40 years. The increase in tradable goods prices is a result of the global recovery from the Coronavirus (COVID-19) pandemic, including the effects of imbalances in the product and labor markets. A significant increase in gas prices has also been seen in food and energy prices this year, largely due to the Russia-Ukraine conflict.
The high dependence on Russia for gas supplies has made energy prices a more significant factor in inflation in the UK and Europe. Inflation in consumer prices depends on the relative amount of consumption expenditures on energy and the extent to which energy price movements are passed on to consumers.
In France, Germany, and Italy, energy plays a more significant role in consumer price inflation than in Canada and the United States.
Impact of Russia’s invasion of Ukraine on Global Markets
There has been a profound impact on human well-being as a result of the Russian invasion of Ukraine, first and foremost for Ukrainians themselves, but also for the world at large.
“Russia’s war in Ukraine is the biggest culprit pulling the global economy into a downturn”,IMF Chief
According to the head of the International Monetary Fund, Russia’s invasion of Ukraine has had an outsized negative impact on the global economy this year – and is likely to continue doing so in 2023. “It is our opinion that the war in Ukraine will be the biggest negative factor in the economy this year, and possibly next year as well,” Kristalina Georgieva told CNBC. As a result of the Ukraine war, food and energy costs have also increased dramatically, resulting in significant inflation.
To curb soaring prices, central banks such as the Federal Reserve have increased interest rates aggressively, weighing on economic growth as well. A report by the International Monetary Fund in October predicted that global growth would fall from 3.2% in 2022 to 2.7% in 2023 as a result of the Ukraine war. There have been no more weak growth profiles since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.
There has been a joint declaration issued by the governments of the group of nations condemning Russia’s ongoing invasion and asking it to bring an end to the conflict. It is predicted that the coming economic downturn will be much worse than expected, wiping out $4 trillion from the worldwide economic output by 2026.
Tightening Cycle from Major Central Banks
The global financial markets have been on a roller coaster in 2022 as investors attempt to gauge how quickly and to what extent the Federal Reserve of the United States and other major central banks are going to raise rates to combat inflationary pressures, while worries about a slowdown in global growth have also been on the rise.
In many countries, the inflation rate is at multi-decade highs, and pressures are extending beyond food and energy prices. Policymakers are turning toward tighter policies to tame high inflation. Several emerging market central banks began raising interest rates aggressively this year. It’s only natural. Central banks have resorted to a “whatever it takes” strategy in order to reduce inflation to their target levels.
Aggressive Rate Hikes
Since the beginning of this cycle, the 10 largest developed economies have increased interest rates by a combined amount of 2,165 basis points (bps). The following is a comparison of policymakers’ positions from hawkish to dovish.
1. United States
In the US, the rate hike cycle of 2022 is the most rapid, nearly twice as fast as that of 1988-89. Fed funds rate stands at 4.50%, the highest since 2007.
Although the Fed has been criticized for raising rates aggressively, the central bank’s reasoning is that major policy changes can take up to three years to take effect. Fed officials hoped to prevent inflation from surging by raising rates early and gradually. However, a weakening economy has fueled speculation that the Fed will soon pause its aggressive monetary tightening, pushing the dollar down from recent two-decade highs.
2. Euro Zone
In July, the European Central Bank announced its first increase in interest rates in 11 years, raising rates by a half-point. To combat high inflation, policymakers at the European Central Bank agreed that monetary policy should be normalized and tightened even in a shallow recession.
ECB policymakers raised their key interest rate in December by 50 basis points, following a 75bps hike in October, which brings borrowing costs to their highest since early 2009 at 2.50%, with monetary policy decisions being data dependent and are being made meeting by meeting.
3. Great Britain
During its December meeting, the Bank of England raised interest rates by 50 basis points to 3.50%, the largest rate increase in 33 years, increasing borrowing costs to their highest level since late 2008. In addition, the central bank said that further increases in bank rates may be needed to maintain inflation at a level below what is priced into financial markets.
The recession would be shorter if the Bank of England does not raise interest rates further – with a quarter of positive growth in the middle, and a cumulative loss of output of around 1.7%.
From February 2022 to December 2022, the Bank of Canada rapidly increased its policy rate from 0.25% to 4.25%, causing prime rates as well as mortgage rates to rise. One of Canada’s most aggressive rate hikes was prompted by a high inflation rate, 6.7% in March 2022 and 6.9% in October 2022.
On December 7, 2022, the Bank of Canada announced a 0.50% rate increase to close out a year filled with events. It is the seventh rate hike this year for the Bank of Canada, which now has its policy interest rate at 4.25%. With the central bank raising interest rates by +0.50% to end the year, some signs suggest we may be nearing the end of the cycle.
5. New Zealand
Despite forecasts that New Zealand will tip into recession in 2023, the central bank raised the official cash rate by 75 basis points to 4.25% on Nov 23, 2022. This is the largest rate hike cycle in New Zealand’s history, as the central bank attempts to curb the country’s 7.2% inflation rate.
Having raised the cash rate nine times in a row since October 2021, the RBNZ is now on its most aggressive policy tightening since 1999 bringing rates to the highest since January 2009.
On December 2022, Australia’s central bank raised interest rates to their highest level in 10 years, making mortgage holders more vulnerable to rising prices. Since May, six previous hikes have raised average mortgage costs by more than 1,000 Australian dollars ($672).
It is expected that interest rates will rise further over the coming months, but there is no predetermined course. Since May, the RBA has raised rates every month accumulatively by 250 basis points, pushing its key rate to a nine-year high.
Bank of Japan is the lone dovish central bank among major central banks, keeping benchmark bond yields low and sticking to its dovish policy guideline.
The yen has weakened sharply due to the widening gap between Japanese yields and those elsewhere, prompting Japanese authorities to intervene to stabilize the currency. In the opinion of policymakers, it is not contradictory to intervene in both the currency and bond markets.
Is Economic recession around the corner?
It is extremely difficult to predict recessions before they occur. Usually, by the time a recession is announced, the worst of its effects on markets have already passed.
As of now, this is a critical moment for the global economy: the inflation rate is running at multi-decade highs, central banks are pursuing tightening cycles with the most aggressiveness they have experienced in several generations, and a recession is now increasingly expected in the US and Europe. It is widely believed that 2023 will be the third-worst year for global growth since the financial crisis in 2009 and the pandemic in 2020. But how certain we are heading towards recession?
Global economic conditions were undeniably affected by the Covid-19 pandemic. And just as the economy was struggling to recover from this, things took a terrible turn for the worse when the Russia-Ukraine war broke out. As a result of these two factors combined, the global economy is expected to enter a mild recession in 2023. Furthermore, as the Fed keeps raising interest rates in an attempt to combat 40-year-high inflation, many analysts predict a recession is more likely.
A recession is 63% more likely to occur in the next 12 months, according to economists, up from 49% in July. This is the first time the survey has put the probability above 50% since the last recession ended in July 2020. Here are 5 Practical Ways A Trader Can Survive A Recession.
In spite of the fact that a global recession is predicted for 2023, it cannot be predicted how severe it will be or how long it will last. While recessions of all kinds are painful in their own way, not all are as severe as the Great Recession of 2007-09.
How does a Recession identified?
Although there have been some negative trends in the economy this year, the NBER believes that the current economic expansion is still ongoing. Despite the fact that GDP has declined for two consecutive quarters, employers are adding workers at an impressive rate.
Rather than focusing on a few sections of the economy, the NBER is expecting a drastic decline across the board; this is especially evident in the labor market. Further, a decline usually has to persist for at least a few months.
The recent Covid recession was the one notable exception. In spite of that, the NBER had to be flexible in its definitions because of the severity and breadth of the decline. The NBER must ensure that each of its three criteria-depth, diffusion, and duration-has been met before reaching a conclusion.
US Dollar Retains Dominance in 2022
The US dollar has risen to multi-year highs against other currencies, such as the euro and yen, and continues to be the dominant currency in 2022. Approximately 88% of all currency trades are conducted in the US dollar, which has not changed much over the past decade. However, the euro’s share has fallen from 32% to about 31% in the last three years.
Although things are strange in the US economy right now, the strengthened US dollar has become a better investment than most other currencies due to a variety of factors.
Kenneth Rogoff, professor of economics at Harvard University and former chief economist of the International Monetary Fund, said that the Federal Reserve is on pace to raise interest rates faster than other major countries. After keeping interest rates near zero during the pandemic, the central bank began raising rates in March, and they have now increased three-quarters of a percentage point multiple times. Higher interest rates make the dollar more attractive to investors since they can earn higher returns.
The Safe Haven US Dollar
The current cyclical environment has made portfolio protection a major concern for traders and investors, as Covid-19, inflation, interest rate hikes, and European conflicts have all created uncertainty in the global economy. Smart investors usually restore safe-haven assets as a hedge to offset risks in their financial portfolios during declining economies, such as we are experiencing today. In times of financial crisis, and amid the decline of traditional assets, investors are attracted to safe-haven assets!
Vassili Serebriakov, a UBS investment banker, said the dollar acts as a “Safe Haven”. When investors are concerned about the global economy, they put their money into safer assets like US Treasury bonds. Consequently, the currency has appreciated in value.
The US dollar (USD) has the reputation of being a safe haven currency because the US economy is the strongest worldwide. Over the course of the past few decades, interest rates and exchange rates have remained stable. Furthermore, since the USD is a top global reserve currency, it is used in many global business transactions and is not adversely affected by domestic or international uncertainties.
On top of that, the dollar has the highest liquidity level on the foreign exchange market, so it is easy for traders to convert their assets into dollars. The chart below shows the performance of the US dollar over the past ten years, as measured by the US dollar index.
How does Stronger US Dollar Burden the Global Economy?
As the US Federal Reserve battles inflation at home with higher interest rates, other countries are experiencing profound hardship with rising prices, ballooning debt payments, and increasing recession risks.
As the dollar strengthens, short and long-term interest rates in the U.S. rise, along with global market stress or flight to the dollar due to its perceived safety,” according to Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics. “There is a slowdown in developed economies everywhere as a result of tighter financial conditions.”
Trade-weighted dollar indexes have climbed 10% since 2002, while emerging-markets measures are up only 3.7% this year and remain well below their peak following the pandemic in 2020. That’s because “dollar strength reflects not only an expectation about the Fed funds rate hikes this year — which means more demand for US fixed-income assets — but also global recessionary risks arising from higher policy rates around the world than previously expected.”
The US dollar has an outsized influence on global finance and trade. Regardless of where they are located, multinational corporations and financial institutions use the dollar as the world’s reserve currency to price goods and settle accounts. The price of energy and food tends to be determined in dollars on the global market. Likewise, many developing nations owe a debt to developed nations.
A study by the International Monetary Fund found that approximately 40% of global transactions are conducted in dollars, whether they involve the U.S. or not.
In other words, every time Fed chair Jerome Powell addresses the central bank’s next interest rate decision, he is increasing the cost of borrowing for the entire world.
There has been a particularly painful impact on emerging economies with large dollar-denominated debt balances. Recently, Argentina banned 31 imports it considered nonessential, including yachts and whiskey. Food prices in Africa’s largest economy have risen nearly 20% on a yearly basis due to the fall of the naira, Nigeria’s local currency. The costs of Sri Lanka’s foreign debt repayments have also soared since it defaulted in May.
Forex Market Exchange Turnover Leaps in 2022
OTC Foreign Exchange Surpasses $7 Trillion
Daily trading volume in OTC foreign exchange markets hit $7.5 trillion this year. According to the latest BIS OTC foreign exchange turnover survey published in October 2022, FX trading volume was up 14%, compared to $6.6 trillion recorded three years earlier. The turnover in FX OTC trading was among the lowest since 2004, according to the survey.
Trading in FX swaps and the spot market remained the major driver for global FX turnover. FX spots accounted for 28% or $2.1 trillion per day. FX swaps, the most traded instrument, had a bigger share of global trading increasing from 49% to 51% this year, with a global turnover of $3.8 trillion a day. Meanwhile, FX options accounted for 4%, and outright forward shares remained at 15% in 2022, unchanged from the last survey.
The major increase in inter-dealer trading is seen to reflect the elevated volatility in the currency market, now accounting for 46% of global turnover in FX markets, up from 38%. Turnover for other financial institutions went down to 48% of global turnover, from 55% in 2019.
On the other hand, the share of non-financial customers remained on the downside, sliding from 7% to 6% in 2022.
FX trading remains concentrated in five major financial centers around the world; the United States, the United Kingdom, Singapore, Japan, and Hong Kong SAR. Collectively, they share 78% of all FX global trading. Nonetheless, the United Kingdom remained the FX center, contributing 38% of global turnover, albeit sliding from 43% three years earlier. Cross-border trading accounted for 62% of FX global turnover in April 2022, rising from 56% in 2019.
USD Maintains Dominancy over the FX Market
Unsurprisingly, the US dollar remained the world’s top traded currency with a dominant share of more than 88% of all global trades, unchanged from the last survey. In second place, comes the Euro with a global share of 30.5% in April 2022. Despite the sliding shares from 32% reported in 2019, the euro continued to be the second most traded currency worldwide. The shares for the Japanese yen and British pound sterling remained unchanged at 17% and 13% respectively.
The major leap was for the Chinese renminbi which recorded the biggest increase becoming the fifth most traded currency, from 8th place in 2019. The share of the Chinese renminbi was up from 4% to 7% in April 2022.
Robust Growth in Emerging Markets
It wasn’t long ago that emerging markets were outperforming developed markets. During the recent period of rapid growth, emerging markets have gained an increasing share of global GDP, largely at the expense of western Europe. There was a particularly striking performance in Asian emerging markets; along with China’s, especially India’s, skyrocketing rise, South Korea and Indonesia also had quite a good year.
Emerging markets have experienced strong growth across the board for a variety of reasons including the large pool of low-cost labor, combined with resource-intensive manufacturing.
A lot of Latin American economic growth can be explained by exporting low-cost manufacturing products to North America or exporting commodities to China. The EU’s large-scale expansion in the mid-2000s led to stronger export-led growth in central and eastern Europe as these economies became integrated into western European supply chains.
Best Performing Emerging Economies
It is usually bad news for emerging markets when interest rates rise in the U.S. and Europe, the dollar strengthens, and the market becomes volatile, making investors risk-averse. Nevertheless, some of them are holding up relatively well and are expected to outperform developed markets in the near future. Furthermore, emerging markets now drive more than half of the global economic growth.
Strong demand for crude oil and metals such as copper and nickel has benefited commodity producers, including Indonesia. A number of emerging market central banks have been more proactive than the Federal Reserve in fighting inflation, such as those in Brazil. The tensions between the U.S. and China, as well as the war in Ukraine, benefit India and Indonesia as a result of structural trends.
Among emerging markets, fund managers see India as taking China’s place as the world’s third-largest economy by 2030, according to Capital Economics. In recent months, foreign investors have bought stocks in India in large numbers.
Globally, roughly 30% of production comes from the BRIC nations (Brazil, Russia, India, and China). There have been some spectacular returns from these countries over the years. The following emerging markets are also in the emerging stage: Mexico, South Korea, Colombia, Indonesia, Egypt, Turkey, and South Africa. The combined value of India, Indonesia, and Brazil makes up less than a quarter of the broader emerging market index.
India A ‘Star’ Among Emerging Market Economies
India Better Positioned to Navigate Global Headwinds Than Other Major Emerging Economies. New World Bank report revealed.
According to the World Bank’s latest India Development Update, a flagship publication of the organization, India’s economy has displayed resilience despite a challenging external environment. While the global environment is deteriorating, the report titled “Navigating the Storm” finds that India’s economy is relatively well positioned to weather global spillovers compared to most other emerging markets.
In 2022-23, the Indian economy will experience lower growth than in 2021-22 as a result of tightening monetary policy, slowing global growth, and higher commodity prices. However, India is expected to register strong economic growth in the coming years, despite these challenges, driven by robust domestic demand.
“Despite the deteriorating external environment, India’s economy has remained resilient, and its macroeconomic fundamentals are stronger than those of other emerging market economies,” said Auguste Tano Kouame, World Bank’s Country Director in India.
The Leap in AI & Automated Trading
Automated trading systems are tools that execute trades based on pre-set rules for entering and exiting trades. It’s a well-known fact that automated trading is commonly used in the stock market for a long time. A study carried out by JPMorgan in 2020 revealed that more than 60% of over $10M trades were executed using algorithms, and AI executed trades are expected to reach $19 Billion by 2024.
However, the stock market isn’t the only market that benefits from AI and Automated trading, the Forex market is witnessing a big leap in AI trading as well. Forex remains the biggest market that is worth an estimated $1.93 quadrillion with $7.5 trillion being traded daily. Low-cost trading, variety of assets, high liquidity, and constant development of technology has opened the doorway to many new retail traders looking to try their hand on the market.
Forex traders have been relying on AI to help minimize risks while maximizing profits. Now retail traders or even beginners are encouraged and should consider using Automated Trading System as it has become more accessible. Its rise in usage and popularity can be contributed to several factors below:
- Availability: When it comes to bot trading, people often think they need to write their own algorithms with complex code but it is no longer the case now. Nowadays traders can easily access the automated trading system through trading communities, forums, or even some online forex brokerage sites, they just pick from a wide range of available bots that have been coded by professionals and shared publicly, usually for a fee, to download and use.
- Easy to install: Metatrader 4 and 5 have truly revolutionized the use of Automated Trading Systems in forex trading. All traders need to do with their newly acquired bots is putting the code in the appropriate folder and then run it in less than 5 minutes. No complex steps are required, so any can use it even with little computer knowledge.
- Time-saving: The use of AI streamlined trading eliminates the need to spend a lot of time analyzing the market to stay ahead of the competition, which enables a hand-off trading experience for traders.
AI and Automated Trading Systems can be thought of as the future of forex trading with many benefits for forex traders as technology advancements keep coming in. In recent years, FX and CFD brokers have also adopted new technologies to enhance and provide smoother and more profitable trading experiences using Automated Trading Systems.
The Crypto Hype Continues
The Race to Create Widespread Digital Currencies
Money doesn’t have to only be printed or minted anymore. We are living in an increasingly digital age, and many central banks around the world are considering issuing their own digital currencies.
A digital currency is simply a digital version of money rather than a physical one. A central bank’s digital currency is a digital version of the country’s physical currency – such as a digital dollar, euro, pound, or yuan. This means that “$10 of a US digital currency will always be the same value as a $10 note”. Talks about central banks issuing and managing digital currencies to govern a country’s currency, supply of money, and monetary policy are still in debate.
How safe are central bank digital currencies?
The European Central Bank (ECB) expects to introduce a digital euro across its 27 member states by mid-decade, describing central bank money as “risk-free money guaranteed by the state”.
Since CBDCs are pegged to a country’s national currency, they do not have the volatility of privately issued digital currencies such as Bitcoin, Ether (Ethereum), and XRP. According to the Federal Reserve, a CBDC would be “the safest digital asset available to the general public, with no credit or liquidity risk “.
How do central bank digital currencies work?
According to central banks, CBDCs could be used to digitally pay for everything, allowing people to use less cash. These digital currencies can either be held as accounts or electronic tokens with the central bank. Mobile devices, prepaid cards, or other forms of digital wallets could be used to store these electronic tokens. CBDC can also be used by businesses and other financial institutions. Rather than replacing physical cash, a digital currency would complement it.
How many countries are considering central bank digital currencies?
Approximately 100 countries have expressed interest in CBDCs, according to the Atlantic Council’s Central Bank Digital Currency Tracker.
Nigeria in Africa and Jamaica in the Caribbean are among the countries that have already launched their own digital currencies. In October 2020, the Bahamas became the first country in the world to roll out a digital currency backed by its central bank, called the Sand Dollar. By 2023, China is expected to launch its CBDC.
Several countries of the G20 – which includes Japan, India, Russia, and South Korea – are exploring digital currencies to be issued by their central banks. Both the US and UK are researching CBDCs, but haven’t committed to introducing any yet.
Reports from Reuters indicate that the central banks of Sweden and Norway started a project with the Bank for International Settlements to test digital currencies for international payments and remittances in September 2022. The Reserve Bank of India launched its first pilot for retail digital Rupee (e₹-R) on December 01, 2022. Banks would distribute the e-rupee, which would carry the same value as physical banknotes and coins.
Crypto Crash 2022
Cryptocurrencies have seen one of the biggest tumbles in prices over the years. In the first six months of 2022, the collapse of TerraUSD and Luna caused a major downfall for every major cryptocurrency. Now we are at the end of the year and another major hurdle has come for the crypto market as 2 major crypto exchanges filed for bankruptcy in November with multiple crypto companies are now in dire financial situations, including insolvency.
Bitcoin, the biggest and most popular cryptocurrency, dropped below $16,000 in November, just a year after reaching its all-time peak of $69,000 in 2021, and is now trading at 80% lower. Other major cryptocurrencies have also seen a sharp fall in prices, with the global cryptocurrency market cap down by 63.96% this year (According to coingecko). This crypto crash has been famously duped by investors as “crypto winter”.
Read also: Is This The Right Time For Crypto Trading?
The fall of Giants
The collapse of FTX
Crypto investments involve many challenges and on top of them is keeping your funds safe. Crypto exchanges, the intermediaries between crypto buyers and sellers, are often targeted by hackers. Through the years we witnessed millions of dollars go away.
In November, FTX bankruptcy took over the headlines. Formerly one of the largest crypto exchanges, FTX announced filing for chapter 11 bankruptcy protection following a liquidity crisis that completely wiped its entire valuation of $32 billion. This came after days after users’ accusations of fraud and market manipulation. Just a week prior, FTX’s CEO and founder resigned adding more turmoil to the firm’s unpreceded crisis and shaken the credibility of the whole crypto market.
Major concerns about insufficient capital drove customers away and the exchange was forced to agree on selling to Binance, another exchange rival, but the deal fell through. According to the bankruptcy filing, FTX has over 130 affiliated companies listed with its asset valuation ranging between $10 to $50 billion.
Crypto lenders followed suit
Crypto lenders, which many considered the bank of the crypto world, boomed during the pandemic by offering retail customers with yields as high as double-digit rates for their deposits. A traditional bank account may earn less than 1% in interest, in comparison returns can be as high as 20% with some crypto lenders.
Crypto lending means depositing cryptocurrency on a platform, which in turn is lent out to people that want to borrow crypto in return for regular interest payments on a daily, weekly, or monthly basis.
Following the collapse of the major crypto exchange FTX, cryptocurrency lender Blockfi also filed for Chapter 11 bankruptcy protection in November due to significant exposures to FTX. BlockFi said in their announcement statement: “This action follows the shocking events surrounding FTX and associated corporate entities and the difficult but necessary decision we made, as a result, to pause most activities on our platform.”
“Since the pause, our team has explored every strategic option and alternative available to us, and has remained laser-focused on our primary objective of doing the best we can for our clients.”
“These Chapter 11 cases will enable BlockFi to stabilize the business and provide BlockFi with the opportunity to consummate a reorganization plan that maximizes value for all stakeholders, including our valued clients.”
According to the court filing, Blockfi has more than 100,000 creditors with FTX being its second-largest creditor with $275 million owned on a loan extended earlier this year and $30m to the US Securities and Exchange Commission (SEC).
Blockfi wasn’t the only one that filed for bankruptcy, as earlier this year in July, two of Blockfi’s former major lenders, Celsius Network and Voyager Digital also filed for bankruptcy due to significant losses to both companies caused by extreme market conditions
The collapse of the former second-biggest exchange FTX triggered a massive outflow from the cryptocurrency market. In the following week, all crypto funds experienced huge outflows with Gemini, OKX, and Crypto.com having the worst draining of funds. According to a report by CoinShares, estimated outflows for crypto investments totaled $23 million, the highest in 12 weeks.
“We had argued last week that, similar to what we saw after the collapse of TerraUSD last May, the current deleveraging phase that started with the collapse of Alameda Research and FTX is likely to reverberate for at least a few weeks inducing a cascade of margin calls, deleveraging and crypto company/platform failures,” JPMorgan’s analysts wrote.
Bitcoin, the biggest cryptocurrency on the market, saw outflows of 742,401 Bitcoin between Nov. 9 and 15 according to the on-chain data provider CryptoQuant. Nov. 9 was the highest day of outflows with 168,287 bitcoins have been withdrawing from exchanges.
Shaken crypto credibility
On the other side of highly volatile cryptocurrencies, we have the stablecoins like USDT. Cryptocurrencies that are pegged to another asset, like fiat money or gold. These currencies are designed to ensure price stability, compared to the high volatility in other digital assets. They are primarily used as value storage for traders to quickly enter and exit positions in their trades without the need to convert to a fiat currency.
Stablecoins are considered by many as less risky compared to others crypto assets with lower price volatility. However, the fall of TerraUSD, one of the world’s largest stablecoins, has sent a shockwave through the market. The so-called stablecoin turns out to be not so stable after all which has left many people wondering whether cryptocurrencies are just another scam or speculative assets with no real value.
This year has continuously shaken crypto credibility. One event after another has truly left people questioning their trust in an unregulated and highly volatile market. Regulations are now more necessary than ever to ensure security and transparency so that we can avoid another FTX.
Rising Awareness of Investing
Hedging against inflation
With inflation becoming a major concern for everyone in 2022 as the recession is around the corner, it’s vital for traders and investors to consider inflation hedging.
Inflation hedging is simply defined as an investment tactic that helps mitigate the negative impacts of inflation and protects investors during hard times. An investor can plan for inflation by looking for asset classes that can outperform others during economic instability.
Generally, real estate and commodities like gold are often considered all-time investments to hedge against inflation. Despite the fluctuation of value, over the long term, they tend to retain their value and provide good protection against inflation.
Forex trading is also another excellent option to hedge against inflation as the forex market tends to behave differently in a recession compares to other markets. Currencies from economies with strong net foreign asset (NFA) positions are among the best choices. The three most notable candidates are the US dollar, Japanese yen, and Swiss franc.
Careful planning and understanding of which assets are good for inflation hedging can protect you from vicious inflation and keep your portfolio thriving.
More people restore to investing
2022 has been a rough patch for the financial industry with more downs than ups. However, the good news is that more people go for investment options today than ever before, especially the younger generation.
The Covid pandemic had changed people’s attitude toward money, focusing more on the need to be financially resilient to protect themselves against potential risks. More people are putting their money into investing rather than spending on commuting, holidays, entertainment, or eating out. Young people have also taken a keen interest in managing their money and investing.
Another factor can be attributed to the burst digital age of investment, as investing is made easier and simpler than ever through new and user-friendly trading apps.
The younger generation is also more likely to seek financial advice on social media with an estimation that 60% of TikTok users are millennials and Gen-Z. Read more on Millennials and Gen Z: How the New Generation Invest? This helped in the rise of Finfluencers, people that often give advice and information to the ordinary investor on a variety of financial topics from trading to personal finances. Nowadays, people can easily find millions of posts about investing on popular social media platforms like TikTok or Instagram, ranging from stocks, forex trading, cryptocurrencies, and NFTs.
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What to Watch in 2023
- Inflation and Interest Rates
The central-banks intervention to tame soaring inflationary pressures is expected to shape the path of economic growth for 2023. The good news is, inflation is seen peaking in Q4 2022. Decelerating growth and supply constraints concurrently with cooling inflation following back-to-back rate hikes will likely prompt the central banks, led by the Federal Reserve, to end the aggressive rate hiking cycle seen this year.
“Amid the highest inflation in decades and extraordinary uncertainty about the outlook, markets have been extremely volatile.”IMF Global Financial Stability Report October 2022
The Fed has tightened monetary policy faster than ever before, and it’s expected to deliver more relatively smaller hikes, before taking a break hold by the end of Q1 2023. The central bank is anticipated to deliver a 50bp hike at the December meeting, followed by two 25bp hikes in February and March next year, bringing the Fed federal rates to 5%, the highest seen in decades.
- Geopolitical Tensions
The ongoing Russian-Ukrainian war is expected to add more chaos to the economic scene. The International Monetary Fund downgraded its outlook for the world economy in 2023, referring to multiple threats including Russia’s war against Ukraine, high-interest rates, and persistent inflation, which added to the lingering consequences of the pandemic.
European markets are struggling with the unprecedented energy crisis triggered by the Russian-Ukrainian war, alongside the continued supply chain constraints, and worsening economic prospects. A theme that is expected to continue next year.
- USD Appreciation
The US dollar hit multi-decade highs this year amid a widening monetary policy gap and cash inflows toward safe-haven assets. The DXY trade approached the 115 level in September supported by the intensified risks surrounding the global economic outlook, soaring inflation, and risk aversion mode.
The global markets are confronted with a multitude of risks including the strengthening US dollar, volatile commodity markets, high borrowing costs, stubbornly high inflation, heightened uncertainty, and consequences of policy tightening in advanced economies.
The appreciation of the US dollar forms a new challenge for both advanced and emerging markets, where several central banks have decided to intervene in the foreign exchange market, or have signaled their readiness to do so. The main objective was to limit domestic currency volatility and the impact of higher import prices on inflation.
In summary, Forex markets are expected to experience a period of significant growth and volatility in 2023. The increasing globalization and economic uncertainty have led to increased institutional investment in foreign exchange, with the long-term trend expected to be in favor of emerging markets. The proliferation of online trading platforms has also made it easier for smaller investors to access these markets, creating a more diverse playing field and increasing overall liquidity. In addition, increasingly sophisticated analytics tools are providing traders with better insights into market movements. All this suggests that 2023 is looking likely to be an exciting year for the forex market!