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Going Greener Recycling is a good thing - just ask the environmentalists - but is it a good in FX? Colin Lambert thinks this year, it could be decided that it is not. The phrase "liquidity mirage" is almost as old as e-FX trading, but it's hard to believe that the originator of that phrase had today's FX market in mind. In 2003, when many of us first heard then Bank of England chief dealer Martin Mallett use the phrase, even the e-world was a very different place. Technology had not yet democratised the industry, non-bank market makers were finding their way in equities and futures markets and yet to really enter FX, and there was a real divide between market maker and liquidity consumer.
And the Pendulum Swings Back Institutional investors have long understood the value of diversifying their portfolios, and this usually means investing internationally. But when they buy foreign equities, they’re actually buying two portfolios, the first being the long equities denominated in their base currency, and the second is that they’re shorting their base currency against the foreign currency they need to purchase the equity. This presents institutional investors with a choice: they can do nothing and accept the risk of holding this foreign currency, hedge that currency exposure passively or manage it actively.
Edging Towards the Exit? The use of a last look window by market makers will decrease in 2018, but don't expect the practice to disappear any time soon, says Galen Stops. If you're sick of reading endless articles and hearing lengthy debates at conferences regarding last look, then the first part of this prediction will be music to your ears: in 2018 the industry conversation will move on from this topic. This prediction comes despite a second one, that last look will not disappear in 2018. Yes, XTX Markets made headlines by committing to a zero hold time on their FX trades – not to be confused with offering firm liquidity – while other market makers have made more private assurances of a similar kind.
Can Peer Pressure Work? 2018 is a big year for the FX Global Code as it will celebrate its first anniversary – a date by which all participants are expected to have adhered to the code’s principles. Will the code be a success? Colin Lambert thinks he has the answer. It was, and still is, depressing having to read through legal papers and regulatroy notices on a regular basis, all of which deal with misconduct in FX markets, and nobody whould be misguided enough to think that such actions will not continue in the year ahead. They will, and probably the year after that. There is an upside in having to rake over the ashes of past misdemeanours, however, because it offers a timely and regular reminder of the importance of the FX Global Code.
Not Necessarily Consolidation But... There isn't much left up for grabs, but 2018 will see a deal in the platform world, says Colin Lambert. In all the history of the Profit & Loss Crystal Ball, platform consolidation has been the most fertile ground.....mainly for critics! If viewed in terms of the number of deals, however, the story is a little different. The headline has been in demand from exchange groups for an OTC presence, culminating in deals for Hotspot, 360T and Fastmatch, and it is hard not to see this continuing – in spite of CME finally deciding to do something about further penetrating the OTC space by launching a service itself rather than entering partnerships.
One Cryptocurrency to Rule Them All? Other cryptocurrencies will continue to catch up with bitcoin this year, but this is by no means a bad thing for this nascent industry, says Galen Stops. "Whether it works out or not, the bitcoin story definitely has further to go. And regardless of its success or failure, it seems increasingly likely that virtual currency, in one form or another, is here to stay" - "Does Bitcoin Have a Future?" (Profit & Loss, December 2013). A lot has changed in the intervening years since Profit & Loss published the above statement in conclusion to its first ever feature length article on bitcoin.
EUR to Spring a Surprise on Markets? The euro performed well in 2017, but can it keep going? Galen Stops suggests that political factors mean that this currency could surprise markets in 2018. This time last year, the European Union was still grappling with the fact that one of its biggest members was poised to leave the club, people were nervous about a populist, anti-EU party winning the Dutch general election, and even more nervous about a populist, anti-EU party winning the French election and presidency. As a result, markets were – understandably – pricing a lot of risk into the Eurozone.
MiFID II: Like a Swan Gliding Through Water The continued implementation of Mifid II will be generally characterised by lots of hard work in the background and not much immediate action in the foreground, argues Galen Stops. We all know the metaphor of the swan gliding seemingly serenly through the water, while in fact its feet are paddling away furiously underneath and out of sight. Well that swan is a pretty accurate representation of what the January 3 go- live date of MiFID II was like for many market participants, by all accounts. A huge amount of work had gone in behind the scenes to make sure that firms were compliant so that, when it arrived, the big day passed largely uneventfully.
Bitcoin: That’s the Thing That Goes Up, Right? Not so much a price prediction, more a market structure view, but Colin Lambert believes the nature of trading in Bitcoin will change in 2018. If you ever wanted to know the financial markets' equivalent of playing Russian Roulette, look no further than attempts to predict the price of bitcoin going forward. There were not many who saw a decline in bitcoin at the start of last year, but even though there was a consensus that it was going up (and why wouldn't it when you have a limited supply trying to meeting increased demand driven by publicity?), no one remotely nailed the year-end of $16,000. the highest estimate of the price this time last year was probably around $2,000 - and even during the third quarter of the year when it rose past $4,500 no one was thinking a further quadrupling.
The Great Divide Colin Lambert believes data will become a commodity and will generate a divide between the "haves" and the "have nots". There is little doubt that data drives most things in foreign exchange. Pricing is the obvious area, but client business is now also analysed to great depth as service providers seek to more clearly define the value they extract from their franchises. Throw in operating metrics as well as reporting, and data permeates just about every part of the business.