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 certain times. This article will introduce you to what it means to de-leverage and the possibility of deleveraging in the foreign exchange market.

What does it mean to deleverage?

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

When the capital market improves, 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 effects of leverage begin to become prominent and risks are rapidly amplified. For companies and institutions that use excessive leverage, rising asset prices can make them easy to obtain high returns, and once asset prices fall, losses will be very large, exceeding capital, which will quickly lead to bankruptcy and bankruptcy.

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

Based on the opinions of all parties, deleveraging is the process by which a company or individual reduces the use of financial leverage. The trend of returning money originally borrowed in various ways.

What is meant by deleveraging in foreign exchange transactions?

When the capital market improves, 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 effects of leverage begin to become prominent and risks are rapidly amplified. For companies and institutions that use excessive leverage, rising asset prices can make them easy to obtain high returns, and once asset prices fall, losses will be very large, exceeding capital, which will quickly lead to bankruptcy and bankruptcy.

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

Based on the opinions of all parties, deleveraging is the process by which a company or individual reduces the use of financial leverage. The trend of returning money originally borrowed in various ways.

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 Federal Reserve 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 interest rate of the U.S. dollar is going down regardless of the short-end or the long-end. The RMB exchange rate is generally stable, and the possibility of recurring large-scale foreign debt deleveraging is low.

Judging from the preliminary data in 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 without significant deleveraging. At present, the risk of 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 investment, investors must truly understand and use leverage flexibly to effectively increase the value of returns while avoiding risks. But at the same time, we must also pay attention to the objective risks of leverage, and investors must be psychologically prepared.