Speculation over euro liquidity fades

It is the nature of the financial markets that they are populated by people with opinions. That is, as they say, what makes a market. It is an odd phenomenon that when all those opinions are the same, that is when problems like flash crashes occur.

It has been some time since the last flash crash in the market which happened when Sterling was at the height of its Brexit referendum collapse. Nowadays, such an event is more likely to occur in other asset classes than FX since liquidity is so high.

Over the past few months, until very recently, the common currency has remained in a very tight range and I, for one, was starting to believe that the amount of liquidity available and the fact that banks had “given over” pricing capability to algo’s meant that day traders may quickly become a “vanishing breed”.

I have said before, many times, that patience is a virtue for traders and that chasing the market rarely ends well. I am delighted to say that it now seems that opinions are starting to deviate, and a true market is developing again. The three most traded currencies, the Euro, Sterling and Yen (obviously we leave the dollar out of this equation) are driving opinion as the euro makes new lows for the year, Sterling struggles with several headwinds but there are still pockets of optimism and the Yen is used in its traditional format as a barometer of risk appetite.

Dollar index a tired and outmoded basket

Who oversees the dollar index? I have always assumed it to be the U.S. Treasury since they are responsible for all matters relating to the dollar, but I am wrong. It is “owned” by “ICE”, the Intercontinental Exchange and is in fact registered as a trademark.

It seems that they won something over which they are failing to keep up to date. It is wholly understandable that a renowned indicator rarely needs a makeover, but it is surely time for an either a new index to be developed or for ICE to take the bull by the horns and make it more relevant.

The current makeup (Euro, Yen, Sterling, Canadian Dollar, Swedish Kroner and Swiss Franc has been around since 1973, with the only change in that time being the switch from Deutschemark to Euro when the common currency was introduced in 1999)

One thing is certainly true; that the index has survived the test of time but is that due to apathy or a general feeling that it is still relevant. I have been around these markets a long time and cannot remember Sweden being a major U.S. trading partner.

It is obvious that the index has become outmoded an if it to be a true reflection of U.S. trade then Brazil, China Mexico and South Korea should be candidates although I cannot see either Trump or Mnuchin agreeing to include the Yuan which hovers constantly on the edge of being declared a “manipulated currency”.

My view is “leave it the hell alone”. It is a useful reference, we all know what it stands for and what the levels are so “if it ain’t broke don’t fix it”.

Ifs, Buts and maybes

This market has something for everyone, but it can still become utterly predictable. Not in direction (that would render it redundant) but in reaction.

During my time, as a trader, salesman, analyst and now observer I have seen many different drivers and it is a successful who spots the next one before anyone else. The be able to see that trade is going to fall away as an important factor for the dollar or that continued reaction to the financial crisis are going to see inflation suddenly top G7 central bank lists of major factors.

Of course, were there to be a weaker man in charge of the ECB than Mario Draghi, then the Central bank as a proxy for the Bundesbank would already have withdrawn additional accommodation and raised rates at least once, probably twice.

In the United States the Fed has started on a haphazard tightening schedule but has commenced by trying to both keep the market guessing and being reactive to data.

I am afraid it is one or the other Jay, you either tell us what you are going to to or you don’t. Its pro-action or reaction, like oil and water they don’t mix.

Finally, the U.K. Supposedly the doyen of Central Banks, Certainly the oldest. Caught with their pants down trying to fool the market into believing that despite all that is out there to drive the pound, they wanted us to believe a hike was coming, trotting out the feeblest of reasoning.

Even the most novice analysts could see that it needs more than just telling us you may hike rates we, ourselves need to see evidence and it is the job of the Central Bank to show us where that evidence is.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.