The "New Normal" for FX Traders


Longer-term forces driven by easier central bank monetary policies and “balance sheet recessions” are at play in today’s currency markets, which combine to form what’s being called the market’s “New Normal.”

The “new normal,” as named by Zerohedge, includes Richard Koo's balance sheet recession (or "yin" phase), which is typified by lower spending and lower borrowing for years, as well as money printing for another decade.

The successful trader must understand that others trade the “old normal,” but we are in a new normal world. The old normal, for example, says that monetary expansion leads to more credit and loans, but this is not the case in countries that are in balance sheet recessions.

Guest Commentary: Richard Koo's “Balance Sheet Recession”

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In the old normal world, a carry trade between high-yield and low-yield currencies was possible. At the Euromoney Swiss franc event in March, I had an interesting public dispute with FX Concepts strategist Bob Savage. He told me that the Swiss franc (CHF) will weaken, similar to the Japanese yen (JPY), because it is a funding currency for the carry trade.

Since then, however, the carry trade currencies actually collapsed, and the Australian dollar (AUD), New Zealand dollar (NZD), Indonesian rupiah (INR), Brazilian real (BRL), Mexican peso (MXN), and Norwegian krone (NOK) all weakened. Savage explained that Japanese investors will buy foreign bonds from April on, but in reality, they sold foreign bonds while foreigners bought Japanese stocks. (Read more about the new normal on

In the new normal, interest rates in developed nations will converge to zero, and investors will prefer to hold the safest currencies. Countries like the UK, Spain, France, and Italy are in this “yin” phase, while Germany and Japan have just left it and returned to the “yang” phase.

Figure 1 below shows how Germany and Japan reduced household debt between 2000 and 2012, while the others increased it until 2007. Canada and Australia, in particular, have increased household debt until recently.

Guest Commentary: Household Debt Among G7 Nations

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Markets follow the old normal between October and April, but due to slower US growth and increased German and Japanese growth in spring/summer, they follow the new normal from May to September.

One symptom of the new normal is that the Bank of Japan (BoJ) might hike interest rates earlier than the Federal Reserve. Most certainly, the Swiss National Bank (SNB) will hike rates before the European Central Bank (ECB).

We are still years away from this, however, and that’s time enough to inflate Japanese, German, and Swiss wages and inflation, and due to high unemployment/low participation rates, US salaries will not rise. The conditions are even worse in Southern Europe and France, where salaries should fall according to the ECB’s projections.

By George Dorgan of

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