Macro Trading Strategies: An Overview and Guide

So you want to trade macro? Or for some other reason, learn the concepts behind macro trading. Well, you’re in the right place for that as this piece will uncover the nuances behind macro trading.

Introduction to macro trading strategies

Macro trading is a strategy that aims to profit, capitalise from analysing economic data, making bets on economic and political events that may have an implication on the markets they trade. A true global macro trader has no limits, their portfolio and coverage spans global markets as is in the name, everything from G7 currencies, to South American equities, they truly have a global macro view. That’s what differentiates this trading strategy from other strategies.

When you think global macro traders, the list of names that should come to mind of our generation are the likes of: Ray Dalio, founder of Bridgewater Associates, Luke Ellis, CEO of Man Group and Stanley Druckenmiller founder of Duquesne Capital.

For those of us who are new to the world of global macro trading , it’s worth understanding how large hedge funds segregate global macro into different strategies and approaches before aiming to replicate into our own skillset.

Global macro strategies can be broken down into four basic subcategories, discretionary macro, systematic, CTA (Commodity Trading Advisory) and high-frequency. Don’t worry, I’m going to break these all down for you below.

The Macro Trading Landscape

Now, when trying to understand the macro trading landscape it’s crucial to get a grip of the role macroeconomic factors play in financial markets.

The simplest way to think about this is the following analogy. Think of financial markets as a vehicle, the vehicle can move slow or fast, a lot of that is predicated on the driver behind the wheel. The driver in this instance is macroeconomic data and releases.

Just looking back at the past year, 2022-2023 there’s been a number of instances where economic data releases like inflation, interest rate decisions and central bank speeches caused massive movement across G7 currencies, commodities, equities and fixed income markets.

Take the banking collapse of SVB, FRCB and Signature Bank, if we look at the MOVE Index, a measure of bond volatility at a given time, we can see that the index spiked through the highs of Covid-19 nearly touching bond market volatility seen during the GFC of 2008.

Now, increased bond market volatility is associated with times of uncertainty, fear and panic in markets. Bond volatility is always bad for bonds and markets, mainly because higher volatility increases the uncertainty associated with investing in bonds as heavy fluctuations in the price of a bond also make yields unstable. So during the collapse of SVB, FRCB and Signature Bank bond yields saw a huge decline as investors rushed to Treasuries in a scramble to safety. What market participants use macro trading strategies?

As mentioned above, the largest and main market participants using macro trading strategies are your hedge funds and investment firms whose aim is to analyse macroeconomic data and make certain trades and investment decisions off the back of their analysis. Second, non other than us speculators, for those who don’t know speculators are considered everyday people like you and me, your day traders, or any market participant not part of an institution trading tens and hundreds of millions/billions.

Key macroeconomic indicators and data releases

In the world of macro trading, understanding the factors that influence currency trends is essential. While numerous variables come into play, some fundamental high-level macroeconomic data points stand out as crucial indicators. Data points such as:

  • Gross Domestic Product (GDP)
  • Interest Rates and Monetary Policy
  • Inflation
  • The Labour Market
  • Fiscal Policy
  • Balance of Payments, Current Account

All hold significant importance within macro trading.

GDP is a key metric measured across every economy around the world, providing us with a backward-looking hard piece of data to show the relative economic strength or weakness within a given time period. Although GDP alone does not drive day-to-day price movements, it offers a broader perspective on the relative strength or weakness of an economy. By analysing GDP trends, traders can identify the macro picture and anticipate long-term currency movements.

Interest rates are a crucial tool employed by central banks to manage economic growth and stability. Central banks raise or lower interest rates to influence borrowing costs, consumer spending, and investment levels. In macro trading, interest rates play a significant role as they impact currency valuation. Higher interest rates generally attract foreign investors seeking higher yields, leading to increased demand for the currency and a potential bullish outlook. Conversely, lower interest rates may deter investors, resulting in a bearish sentiment for the currency.

One of the most sought after trades over 2022 was the Yen cary trade, which stemmed from the large interest rate differential between Japan and that of United States, Australia, Canada and some emerging market currencies like the Brazilian real which offered investors yields as high as 17%.