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What does deleveraging mean? What does deleveraging in foreign exchange trading mean?

2022-01-18

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Many investments use the principle of leverage, such as futures and foreign exchange, because the existence of leverage allows investors to obtain large returns at a small cost. Of course, there will be deleveraging in the market at some point. This article will introduce what it means to deleverage and the possibility of deleveraging in the foreign exchange market.

What does deleveraging mean?

Deleveraging refers to the process by which financial institutions or financial markets reduce leverage, and leverage refers to the use of less capital to obtain high returns. This model was adopted by many enterprises and institutions before the outbreak of the financial crisis, but it will bring huge risks when the financial crisis breaks out.

When the capital market is improving, the high returns brought by the high leverage model make people ignore the existence of high risks. When the capital market begins to decline, the negative effect of leverage begins to become prominent, and the risks are rapidly amplified. For companies and institutions that are over-leveraged, rising asset prices can make it easy for them to achieve high returns, while once asset prices fall, losses can be huge, exceeding capital, quickly leading to bankruptcy.

After the outbreak of the financial crisis, the risk of high leverage began to be recognized by more and more people. Enterprises and institutions began to consider deleveraging, reducing their liabilities by selling assets and other methods, and gradually repaying their debts. This process causes the price of most assets such as stocks, bonds, and real estate to fall.

According to the opinions of all parties, deleveraging is a process in which a company or individual reduces the use of financial leverage. The trend of returning money that was previously borrowed in various ways.

What does deleveraging in foreign exchange trading refer to?

The possibility of deleveraging in the foreign exchange market

From the perspective of the market environment, during the last round of foreign debt deleveraging in 2015 and 2016, there was the background of the Fed raising interest rates, and the US dollar interest rate and exchange rate rose. However, the current environment is that the Fed's monetary policy is more accommodative, the US dollar's short-term and long-term interest rates are falling, the RMB exchange rate is generally stable, and the possibility of a large-scale foreign debt deleveraging is low.

Judging from the preliminary data for the first quarter of this year, my country's registered foreign debt has risen steadily, and foreign investors have generally increased their holdings of domestic bonds, and there has been no significant deleveraging. At present, the risk of a large-scale deleveraging of my country's foreign debt is relatively small.

Now everyone should know what deleveraging means. At present, the possibility of deleveraging in the foreign exchange market is very small, so investors can still invest as usual. But whether it is foreign exchange investment or other investments, investors must truly understand and use leverage flexibly to effectively increase the return value while avoiding risks. But at the same time, we should also pay attention to the objective risks of leverage, and investors should be prepared psychologically.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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What does deleveraging mean? What does deleveraging in foreign exchange trading mean?

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