Sunday, December 14, 2014

Forex rate movements and their drivers | Possible choppy week into year-end & holiday

At OmiCronFX, our whole raison d’etre is to have some idea about the direction that exchange rates are about to go in when we trade. To this end we watch the outcome of scheduled economic reports, we try to be aware of news events and we attempt to gain an understanding of the motivations of the large players in Forex, those institutions and hedge funds that have the power to move the market.

Despite instances where the reaction to releases can be counterintuitive, and despite the fact that price can oscillate irrationally during periods that are outside of the main trading hours of the London, New York and Chicago Forex traders’ working day (and even within those hours on occasion), it is important for us to be able to believe that different players have different interpretations of the aggregate of the information that is available to them at any given time, and that there is no collusion outside of the ability to be aware of the movement of the exchange rates.

To have a level playing field, all communal information should be in the price, and then at least partially derived from the price. If this is so, it would be reasonable to suppose that there would be a time lag after a less-important information release and the arrival of a consensus on how it should add to the fate of the currency most likely to be impacted (really important news, for example an FOMC announcement on the US core interest rate, will have only one predictable outcome, as everyone is conditioned to react accordingly to either an increase or decrease. In this case one had better be in the market in anticipation as it can move with extreme rapidity).

Some surprised Forex commentators

At the start of this month, on Dec 2nd. 2014, a quiet day for news, most commentators were surprised at the end of the trading day to have to note that Cable, the Pound Sterling against the US dollar pair (GBPUSD) had fallen quite a bit (the word “plunged” was used by at least one)  – around 75 pips, or 75 of the smallest units that a pair can move. Very belatedly, when London was closed and NY was well into its afternoon, they concluded that this was as a result of the CIPS / Markit UK construction Purchasing Managers Index report, which had come in at 59.40 when 61.00 had been expected (anything above 50.00 still denotes expansion).

But that particular release had been at 09:30 that morning, London time, and is normally not one that is accorded particularly high importance (construction activity is not exported as a rule and so does not influence GDP). In addition, as can be seen on the 10 minute chart at top, the market took well over an hour to decide, in its collective wisdom, that the UK Construction CPI outcome warranted a selloff in cable.

This example would seem to suggest that the market movers were anything but united in their reaction to this event, at least until it became clear in what way the majority was going, by reference to the real-time exchange rate movement. We take all of this as a positive for those of us who rely on our alertness and our response to price action in order to profit from Forex trading.

Or should be say the alertness and responsiveness of the algorithmic routines we have developed to assist us in this endeavour?

Possible choppy week heading into year-end & holiday

While there are a number of economic releases this week, of which the most important is the Fed’s monetary policy statement on Wednesday, we are also of the opinion that trading will be dominated by large institutions rebalancing their accounts for the year-end, which will take place in thin trading due to the fact that many market participants will have already left their desks for the holidays. This combination could lead to choppy, irrational trading conditions.

It is not advisable to trade under such conditions. We will continue to test our strategies, however. On Friday we will commence a holiday break in the commentary that will bring us into the New Year of 2015 when we will be back to hit, as they say, the ground running.

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