The quarter end WM 4pm Benchmark Fix passed off without the type of incident seen at the Tokyo Fix earlier in the day, but dealers are scratching their heads about what happened in the minutes leading up to the five-minute window that spans 4pm London.
The expectation was for strong US dollar demand going into the Fix, this was reinforced by events in Tokyo earlier in the day, and at 3.45pm London there was a brief surge in the dollar, with Cable leading the way, gapping lower from 1.2430 to 1.2375. Also hit was EUR/USD, from 1.0986 to 1.0960 and AUD/USD, from 0.6130 to 0.6110, while USD/JPY rose from 107.98 to 108.18 and USD/CAD went from 1.4230 to 1.4265.
One dealer speculates that the move was triggered by the accounts pre-hedging the flow, although a London-based e-FX specialist believes speculators were lured in by a sell order, probably in Cable, that spilled over into the other markets.
Markets then stabilised and the dollar drifted lower into the start of the Fix, during which time markets were orderly. “We have had customers hedging their exposures for quarter end for two days now,” says a senior salesperson in London. “They seemed to have got the message that trying to push through too much in the Fix window would be risky and have spread it out. I also think the volatility we have seen over the past two weeks has meant a lot of rebalancing hedges had already taken place on a daily basis.”
EUR/USD entered the Fix at the 1.0870 level and exited it at 1.0874, while USD/JPY was barely changed around 107.98. Cable fell from 1.2400 to 1.2390, while AUD/USD went from 0.6110 to 0.6120. USD/CAD saw the biggest move, falling from 1.4255 to 1.4220 during the window.
The London-based e-FX specialist says the price action highlights how nervous the market was leading into the Fix, but believes any blood on the streets would be those of speculators or pre-hedgers – the latter highlighting perfectly the argument made by those traders dismissed over trading ahead of the Fix in the chat room scandal. “If you pre-hedged the Fix from 3.45 then you’ve had a bad day, although I don’t actually believe that is what happened,” the e-FX specialist says. “I think what we saw was people trying to jump in front of the expected dollar buying – if it was pre-hedging it would have continued, unless they very quickly saw what happened and stopped. It looks like a either someone tried to spook the market and then sold dollars into the move, or a few prop accounts have had a tough end to the quarter.”
Underlining the fragile nature of markets, the dollar has continued to sell off since the end of the window, perhaps indicating more positions being squared up. EUR/USD has regained 1.10, while USD/JPY is down to 107.60. The moves have been more brutal in the less liquid pairs, with Cable rising to 1.2450, AUD/USD to 0.6140 and again USD/CAD has borne the brunt, falling to 1.4120 from above 1.4220 at the end of the Fix window. Dealers connected with report very thin liquidity conditions exacerbating the flow, one suggesting “it must be like trading on Christmas Day”.
With the quarter end out of the way, attention will now turn to how the FX market enters Q2 and whether liquidity conditions will improve. It seems unlikely, according to the e-FX specialist, who says, “This is how things are going to be until such time as firms can get more of their staff in the office and feel they have enough control over the activities. No one is going to allocate more risk to their FX pricing until things get a whole lot better, if anything it will be reduced further and it could remain that way through April.”