Quite a few of my friends from outside the industry, knowing my background, will ask me for my thoughts on respective currencies, normally because they are travelling abroad or sending money somewhere. Obviously I omit to mention my 24 years of mediocrity in the FX chair and am happy to give them the benefits of my experience and wisdom.
The thing is though, it’s harder and harder to do and that is almost entirely down to not only the changing market dynamic, but also the modern world. Back in the day I would assiduously avoid the executive dining room at whatever institution I was working at, mainly because someone in a pin-striped suit would join you at the table, ask what you do and then ask about currencies, more often than not it was sterling.
You can’t exactly turn around and say, “haven’t got a clue shag” can you? That will inevitably lead to questions being asked of your competence and suitability for the role. So you answer. It used to be a reasonably easy task (although you will not be surprised to hear I got it wrong from time to time!), as through the 1980s and 90s the FX market tended to move in big waves, as witnessed by the success of the trend followers in those two decades.
Now though, people ask and you think “well I think I know where it’s going for the next five minutes”, but beyond that? Haven’t a clue.
I actually do have a strategy for my friends, however, I tell them I don’t think it’s going very far! Thus far in 2018 I have to say, it is working admirably well. EUR/USD? Down around 500 points on where it started the year – that conveniently ignores the leap to 1.26 and the decline to 1.14, but will your friends notice that? Unlikely. Sterling? AUD? Ditto. The fact is for all the short term shifts we are seeing, mean reversion still dominates – people just don’t like holding onto positions for longer than a few days any more.
I think a lot of this is down to the 24-hour news cycle as well as the easier access to market-relevant information. It’s one thing for a 24-hour news channel to report a story likely, for instance, to send the dollar higher, but they aren’t going to do it for the whole 24 hours – inevitably they look for the other side of the story.
Equally, politicians and central bankers’ first instinct is to seek to calm market nerves over developments. They may not be able to actually do anything about the situation (for this read Turkey at the moment) but they can make statements that give people pause for thought.
In other words, “jaw-boning” as it was always known when central bankers used to seek to influence the currency markets, has rarely worked as well, thanks to the short term models operating at most trading firms. Make a statement and you will get a reaction thanks to it being all over Twitter in seconds. And if you can’t follow up on it, i.e. actions do not speak louder than words, then at least you bought some time.
This has changed the whole dynamic of markets and as such has made it harder when someone says to me, “what do you think about…?”
Of course, that hasn’t stopped me playing Nostradamus and I continue to predict with confidence (remember the motto: ‘sometimes right; sometimes wrong; always certain!”
So if you too are asked by friends about the direction of a certain currency pair you have two choices. Shrug your shoulders and mumble something about it going nowhere (followed up with the observation that it could move 10 big figures and not impact you holiday spending plans), or make a big and bold prediction without a time horizon.
I still tend to like the latter, indeed around the turn of the year I told a friend that I thought the Kiwi was going up against the dollar and that “70 cents looks a good floor”.
We currently sit around the 66 cent mark and my friend queried this, to which I replied, “Ah, yes, but it went up to 74 cents first.”
The modern foreign exchange market; hang around long enough and you’re bound to be right at some stage.