Isaac Lieberman, CEO of Aston Capital Management, talks to Profit & Loss deputy editor, Galen Stops, why it’s hard to find uncorrelated markets to trade right now.
“Volatility is very compressed right now because there’s a lot of central bank activity and markets are very highly correlated,” says Lieberman.
He adds that the FX market needs a “theme” that will cause it to break away from other markets, but that in the meantime “we’re certainly waiting for volatility to return”.
Lieberman says it’s become very hard to find uncorrelated markets, with equities, rates and FX all trading in unison and therefore dampening volatility. One reason for these correlations is the lack of interest differentials, but he also highlights central bank intervention as another factor that is causing this.
It’s not necessarily that extracting alpha in FX has become harder, but rather that the way it needs to be extracted is changing, said panellists at Profit & Loss’ Forex Network Chicago conference.
Douglas Cilento, global head of execution at AQR, opened the discussion by point out that FX has traditionally been viewed as a good market for generating alpha because there is a large segment of non-profit seeking market participants, there are inefficiencies in the market and, because currency is not something that can be bought and held with the expectation of a return, it is effectively a market without beta.
In recent years, the FX market has had to cope with some major spikes in volatility, forcing firms to adjust how they trade this market. The number of large market moves on the back of thin liquidity during unanticipated (and anticipated) market events seen last year – from SNB to Brexit to the US elections – raises the question whether there a need for a new “FX Playbook”.
Speaking at Profit & Loss Forex Network Chicago, Stephen Flanagan, executive director, global FX e-commerce risk manager at JP Morgan, highlighted how firms have made adjustments.
There’s something for everyone in this week’s In the FICC of It podcast as Colin Lambert and Galen Stops traverse the US legal system, trading, crypto and China.
Listen in as Lambert explains why he is mystified at the prosecution’s flip-flop in the Mark Johnson case and angry at the FX industry’s previous lack of effort to explain how markets work to the US legal authorities; and Stops takes a look at a new report n his favourite industry – CTAs. Having had the data explained to him, Lambert also thinks he knows why some CTA sectors are doing well and some aren’t, so that’s another of his “theories” then…
Our podcasters then move onto debate whether crypto markets will evolve to an OTC model and whether this would be a good thing for attracting institutional money to what is still a relatively nascent market.
Stops closes out by reporting from an analysts’ briefing this week that highlighted a change in approach on the part of China to its programme of liberalisation of the yuan.