The UK referendum on European Union
membership brought with it a wave of volatility and uncertainty, however FX
markets have rather settled back since the initial shock. Implied volatility
levels are at almost two year lows – lower in fact that ...
The now infamous “SNB Day” forced a number of FX market participants to re-assess some of their long-held assumptions and business practices.
As liquidity evaporated fresh concerns were raised about the lack of risk taking experience and appetite amongst some sell side institutions and the impact of technology on liquidity in stressed market conditions.
As some firms reportedly attempted to re-paper certain trades it also added fuel to the ongoing debate about whether or not the practice of last look still has a place in the modern FX market. This is debate that has continued to rage on, notably at a very lively debate at Profit & Loss’ Forex Network New York conference in May.
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.
The starting point for this column has to be the observation that, by and large, foreign exchange dealers do like a moan. Let’s face it, we’re a bunch of whingers and the events of the past week – thanks to flip-flopping central bankers – have only reinforced this trait. Are we, however, looking at things the wrong way? Markets undoubtedly adjust quicker to events than they used to, but is there an opportunity for traders in this? I happen to think there is.
Today is all about questions – the most pressing of which has to be, if Switzerland issues a digital currency, will it immediately put an offer in the market? Perhaps more pertinently, it is also about the impact of the lack of traders in the FX market, because if the first week of the year is anything to go by then cryptocurrencies will continue to steal the agenda – the traditional FX market just doesn't seem as though it can be bothered.
There is a lot of press around discussing the struggles currency managers are having in making money in markets that ostensibly should be fertile ground. We have some real moves, event risk, interest rate divergence and a changing market structure – all of which would suggest there is an opportunity for everyone, but it's not happening. One of the reasons for this is that different narratives are driving markets at different times - and that makes it hard for a single strategy to succeed.