This column is going to sound angry, but it isn’t really, it is, not for the first (or last) time, more mystified!
I think this morning in Asia we saw how the lack of risk takers in banks is confusing and, possibly, deterring customers from having a punt on events. Into the bargain I think it highlighted the point I made this time last week about how a couple of opportunistic macro funds, who were not ring-fenced by their mandate, are actually having a decent run of things at the moment.
Dealers always complain – it’s a fact of life – especially about the lack of opportunities in the market when things are quiet (there are one or two that complain when it’s too busy as well!) They believe opportunities either rarely exist, or when they do the market moves too quickly for them to exploit the chance.
Around economic data releases, I would wholeheartedly agree – and I would also point out it has always been the case. We all know that data comes out at a certain time and we can plan accordingly, and in today’s market, if there is a surprise to, for example, the downside, the market initially prices it in within a few milliseconds and then adjusts as necessary.
Pre-news reading algos the market went through a period where it dried up for a few seconds ahead of, and after, the event, prices went wide once the number was confirmed, and then someone stuck a bid or offer in on one of the primary venues to reflect the new market level. Go back far enough to voice days and the same thing happened – the brokers went quiet, the news came out, and someone made a price, often 70-80 points away from the last.
In other words, markets have always priced in events well and aside from taking a (sometimes educated) guess on what the numbers will be, trading economic data has always been a little like shutting the stable door after the horse has bolted. Yes, it could change the longer-term direction of the market, but often one release is limited to a knee jerk reaction and is built into a broader view of the market. It rarely changes peoples’ thinking dramatically and so, if you traded post-release, you’ve probably hit top or bottom, or close to it.
Which brings me to the unscheduled events, such as we had this morning in Asia.
Now I will accept that what happened did so at a time when Europe was tucked up in its cot and the US was on the freeway, but dealers are connected these days, so it would not have taken long to get the news – and believe me, there was plenty of time to react!
So the ridiculously chaotic scene that is Australian politics threw up yet another opportunity this morning when the doubts over the Prime Minister’s ability to retain enough support within his party to stay in charge was fuelled by another round of front bench ministers resigning and saying they support his opponent.
I understand that Australian politics may not be on everyone’s agenda, but dealers and fund managers are paid to understand, seek out and execute opportunities like this. The government has a one seat majority in the Lower House and the electorate had made its feeling very clear over the past few days that it was fed up with political parties chopping prime ministers off at the knees (for those unaware, the last four elected Prime Minsters of Australia have all been kicked out by their own party mid-term).
This was, remember, signalling the second attempt to unseat the PM, and so we the centre-right government fell further into chaos, which in turn feeds a disgruntled electorate. We then had a report the Prime Minister himself was not going to compete in a second leadership spill, and you have the headless chicken running around awaiting execution.
The foreign exchange market, however, was initially very reluctant to play the role of executioner. In the hour after the news really broke, AUD/USD dropped by all of 10 points.
Gradually the move manifested itself, and as I write this, the market is 65 points lower and those brave (and patient) enough have had a half-decent day. There are, of course, still people on social media bemoaning how they missed the opportunity! I suppose we should have some sympathy for them, after all, those high frequency traders probably all jumped in front of them…for an hour and a half!
I think today highlights the real lack of risk appetite amongst foreign exchange traders, especially in the banks. These traders have been emasculated by their institutions and the odd regulation, and now sit about waiting for someone, anyone, to do something – they are no longer proactive when it comes to taking positions or acting upon market information, they are, frankly, too-customer focused.
As a digression, I read an argument once about the need to cut editorial staff at the New York Timesin the late 1960s. I have to paraphrase because I don’t have the book to hand or the source of the quote, but it basically said, the Timeshad a whole floor of journalists and editors waiting for the Titanic to sink again.
In FX banking terms, I would say we have a bunch of “traders” sitting around waiting for the next customer deal to manage – there is no proactivity, no initiative. This in turn is not helping some of their customers, who have become too used to accepting that the market is showing them the right level (because everything is priced in immediately), rather than helping to set that level.
If the banks don’t mark the market lower the customer thinks they have read the news wrong – they are probably a little mystified (as I am) by the lack of reaction to the news. On the algo side, they haven’t developed news reading algos for unscheduled events, so that doesn’t help either.
So the result is we all sit here, looking at a market that does nothing until someone is brave enough to metaphorically go “yours”. The algos want data to mark it lower, and that needs people to sell, the people are reluctant to sell because they don’t understand why the algos aren’t marking the market lower – it’s a modern day FX market Mexican stand off.
At some stage people will evolve their models or risk profiles to either take these events into account or allow people to trade on them when they do occur. Until that day though, we will have to continue to listen to people bemoan the lack of opportunities in FX markets. That’s no fun for anyone, so on behalf of the foreign exchange market I would like to suggest those traders spend less time with their mouth open (on Twitter normally) and more time with their eyes and ears open.
Opportunities do exist in FX markets and they are generally pretty good (if relatively short term, measured in minutes or hours), so rather than try to get clever, why not go back to basics and trade what you see in front of you. This is a news-rich environment – take advantage of it while it lasts.