Between The Lines

Aug 29 • Between the lines • 2297 Views • 1 Comment on Between The Lines

Why FX Intervention Never Works And Those End Of Week Spikes… shh

There were two fascinating articles that caught our eye over the last 24 hours that weren’t given as much publication in the mainstream financial press as they deserved. One concerned the currency spikes many of us observed every Friday at 4pm London time each week that we knew they weren’t accidents, or normal trading patterns. The other article came courtesy of CMEGroup concerning currency intervention…

Now manipulation is often discussed on trading forums and for the most part traders are wide of the mark when referring to currency manipulation or spikes. The majority of the time we can clearly trace the fundamental reasons a spike or reversal takes place; high impact news event, or policy decisions by central banks etc., are the key reasons for sudden movements. However, many traders shout “manipulation” regarding even the smallest movement in price that doesn’t correspond with their trading bias. And let’s not forget that in a five trillion dollar a day business it’s incredibly hard, if not impossible, to corner the market.

I’m sure we all have our tales from the riverbank experiences regarding ‘weird’ movements. Mine was noticing, when spread betting the UK FTSE back in the distant past on a clunky market maker platform, that just before the London close at 4:30 PM the price would spike by a few pips in the direction of the current momentum shown on a time frame such as ten minutes, or a 500 tick chart. Looking back I was too inexperienced to realise that there was arbitrage ‘money in those hills’ and quickly gave it up as a trading anomaly, as opposed to calling it out as manipulation. But the spread betting firm was (on reflection) deliberately and callously shaking out positions.

This article from Bloomberg, concerning the discovery of the ‘Friday spikes’, will cause many traders to raise an eyebrow and enjoy a “told you so” wry smile. Here’s a quote with a link to the full article, it makes for fascination reading…

“In the space of 20 minutes on the last Friday in June, the value of the U.S. dollar jumped 0.57 percent against its Canadian counterpart, the biggest move in a month. Within an hour, two-thirds of that gain had melted away.

“The same pattern — a sudden surge minutes before 4 p.m. in London on the last trading day of the month, followed by a quick reversal — occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as euro-dollar, it happened about half the time, the data show.”

CMEGroup in Europe describes itself as;

a London-based, FCA-supervised derivatives exchange. As a wholly-owned subsidiary of CME Group, CME Europe will leverage the operations and expertise of the world’s largest derivatives marketplace and is designed to meet evolving regional needs and trading practices. While offering products across multiple asset classes in time, CME Europe will initially launch with 30 FX futures products, bridging a gap in the European marketplace.”

The managing director of CME, Blu Putnam, published his thoughts this week regarding currency intervention in CME’s blog called OpenMarkets. It’s a fascinating read particularly given that it’s delivered from the direction of an exchange. The article mainly concerns the interventions regarding currency slides, such as the attempted support Brazil engaged in recently.

The article goes onto explain that the emerging economies crying foul, regarding the QE to infinity of the USA Fed and rumours of ‘tapering’, are actually aiming cheap shots at the USA. The reality is that these countries have built systemic failure into their management and policies which are their own independent decisions, their problems are completely are independent of USA policy. Here’s a key paragraph and a link to the full article;

“With any currency decline, it is critical to understand that proximate causes.  And, when the currency decline of one country is associated with similar declines of varying degrees in other countries, then the reasons for contagion need to be assessed as well.  In this case, there are at least two critical factors to consider. First, emerging market currencies are considered relatively risky investments by many. Thus, when global events, such as the Feds potential exit from QE raise risks generally, all assets deemed to be in the higher risk categories are vulnerable to price drops as a wide swath of market participants trim their overall risk positions.

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