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Thoughts from the Forex Trenches

10 Years ago | December 01, 2013 10/25/21, 12:00 AM


In the December Issue:  

  • 2013: A Year Of FX Divergence 
  • Be Wary of Rigged Markets

2013: A Year Of FX Divergence

By Jay Meisler

As we head into the close of the year it pays to take a look back at what has so far been a year of forex trading divergence. Unlike recent times, it has been a year without a major crisis. Even a partial US government shutdown and a deficit ceiling battle that brought the US close to the brink of a sovereign default never escalated into a crisis and those who bet that against a crisis have been rewarded.

It has been a year where central bank policy has been a factor in fx divergence. In the US there is still a never ending debate over when the Fed will start tapering its bond purchases., Fed officials, meanwhile, continue a campaign to temper the potential impact by reiterating that tapering is not tightening,. Abenomics in Japan has seen the JPY tumble while the RBA continues to talk down its currency. The RBA has stepped it up recently by threatening to intervene. The ECB has so far not shown concern over the firm EUR even though the peripheral countries could use a weaker currency as stimulus to offset the effects of austerity.

HERE IS WHERE WE STAND

Year-to-Date

2012 close

% USD chg

% EUR chg

USD

------   -

 ------

 +3.1

EUR

1.3188

-3.1

 ------

JPY

86.76

 +17.8

 +21.5

CHF

.9156

 -1.1

 +2.0

GBP

1.6234

 -0.6

 +2..5

CAD

.9971

 +6.2%

 +9.5

AUD

1.0395

 -14.3%

 +17.9

NZD

.8287

 -1.8%

 +5.0

 

As you can see by the table, 2013 has been a year of divergence with the EUR the outperformer, and the GBP and CHF turning positive for the year this past week. This has confounded the general consensus forecast, which had called for the EURUSD to trade lower this year. This can be explained by various factors, such as a market positioned short, the delay in Fed tapering, a recovery, although very modest, in the EZ economy and general demand coming from crosses as the EUR benefits from its role as the anti-dollar in the overall global reserve mix. In any case, it has been confounding as the EUR has so far outperformed the dollar this year, squeezing those positioned the wrong way despite a rise in US bond yields while stock markets feed higher off the glut in global liquidity and easy monetary policies. I recently saw an analysis based on a chart of the EURUSD on one axis plotted against the March 2014 vs. March 2015 euribor (Euro Interbank Offered Rate) spread on the other axis. Last time the spread was at this level the EURUSD was trading around 1.22. The point here is that past correlations are not currently working.

 

LOOKING AHEAD

Looking ahead, the key focus of forex trading and all global trading in this last month of the year will be on the December 18 FOMC decision. With the risk of a near-term start of tapering back on the table, all eyes will be on the December 6 release of the US November employment report. While the odds of the start of tapering still favor the first quarter of 2014, global markets will be hyper focused on US data, especially the monthly employment report as it will influence expectations of when tapering may start.

In the meantime, current trends are likely to continue with selling the JPY seen as the path of least resistance and commodity currencies remaining suspect with central banks talking them down. As we have seen all year, the path of least resistance is rarely a straight line so expect more of the choppy price action as Fed tapering expectations and year end position adjustments dominate December trading.


Jay Meisler is the founder of the Global Traders Association, the advocate for the global trader and a co-founder of Global-View.com, the leading forex discussion site for more 16 years.



Be Wary of Rigged Markets

By John M. Bland

I have been active in the forex markets for more decades than I am ready to admit. I’ve seen some periods when control of market data was very tight and others when it was relatively loose. Periods of loose security of sensitive market data typically were relatively short and confined to a few select items. In those days, true “leaks” were infrequent. You had no idea where they came from and if they were accurate, so you had to treat them with extreme care.  


LEAKS NOW THE NORM

In recent years, we never hear the data leaks in the market, but it is abundantly clear to anyone who is trading that just about every piece of high impact data has been leaking to some in advance of its official release time. We are not talking about nanoseconds. The markets are sometimes moving 10-20 seconds ahead of its official release time. One recent example was the European Central Bank policy decision to lower its official rates, which saw markets moving 30 seconds in advance. Anyone active in the financial markets knows that 30 seconds can be a lifetime. It has gotten to the point where I look for the market to move ahead of the official release time of key data to see if the data are good or bad.

 

UNFAIR ADVANTAGE

There is a lot of money to be made from the unfair advantage of getting market sensitive data ahead of everyone else and it is pretty clear to me that some have figured out a way to get it consistently.  This goes for all the major markets including forex, fixed income, commodities and equities. All of these markets recently have seen a growing significant participation by computer-driven systems.

 

WHAT DO WE DO?

As individual traders, there is not much we can do about the unfair advantage that some obviously have been getting over the rest of us other than to organize as a group and exert pressure on the regulatory officials to investigate the leaks and do something about them. This corruption must not be tolerated. All traders deserve a level playing field.

As for your trading, we suggest you don’t let yourself be a victim. Don’t leave close stops in the market before major data releases. Also down-leverage your open positions and use the data as an opportunity under the proper conditions to re-enter or initiate new positions.

Don’t be a patsy for the algos. They know the obvious stop levels and use the temporary volatility surrounding a data release to trigger local stops. Most computer algos are mindless. They specialize in “harvesting” our stops. Be smart. Do not be a victim.

 

John M. Bland is a principal of the Global Traders Association, the advocate for the global trader and a co-founder of Global-View.com, the leading forex discussion site for more 16 years.


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