THETRADETECHFX DAILY in-depth
WEATHERING THE FX STORM
FX traders are enduring one of the most challenging periods the markets have ever seen . After a decade of dormancy , interest rates are now moving dramatically as monetary policy makers look to counter inflation caused by the global Covid pandemic , the socio-political climate caused by the crisis in Ukraine and supply chain issues .
Shifting rates globally have contributed to massive volatility as participants turn to the foreign exchange markets amid the uncertainty . Where central banks may have previously offered up to a year ’ s worth of guidance to the market , it is now hard to predict what they may do from week to week . The European Central Bank opted for its largest rate hike since in two decades in the first week of September . The last time it hiked by 75 basis points was 1999 . The Bank of England was previously expected to follow suit with a 75-basis point hike in the second week of September , however this decision was delayed until 22 September in light of the passing of Queen Elizabeth II . These shifts - and the potential for more - make the variety of potential outcomes within the market much wider , creating a patchy liquidity landscape and widening spreads .
What ’ s more as central banks react at different paces to the economic landscape , it leaves room for divergence between countries and currencies , adding another element for participants to accommodate in their day-to-day trading operations . Perhaps the most poignant example is the divergence seen between the monetary policy seen in the US , and Japan and Europe . The US Federal Reserve has taken a hawkish approach to tackling inflation caused by supply and demand issues globally , beginning one of its most aggressive set of rate hikes since the 80s in March and with yet more plans for a potential further 75-basis point hike this month .
Japan on the other hand is favouring a
Amid one of the most uncertain periods in the history of foreign exchange , ANNABEL SMITH sits down with some of the largest liquidity providers to dive deep into how client behaviour has evolved to cope with volatility and shifting central bank monetary policy .
doveish approach in contrast to its fellow G10 countries . The disparity has left the Japanese Yen subject to one of its longest losing streaks in history while the dollar has strengthened . The EUR / USD tells a similar story , reaching parity for the first time in two decades in the wake of monetary policy and market conditions . The situation marks a stark contrast to that seen a few years ago , where flat rates had previously led to discussions around whether markets should go to six decimals in pricing for Eur-Dollar or Dollar- Yen .
“ The differing central bank rate policies , particularly the US versus Japan , China and the ECB [ European Central Bank ] have driven higher volatility , higher volumes and pushed trading down the tenor curve ,” says Hugh Whelan , executive director , EBS , at CME Group . “ We ’ ve seen this increase leading to three consecutive record months for swaps and outrights from June to August for EBS Direct Forwards .”
Weathering the storm These conditions have altered the way firms interact with the foreign exchange markets and the liquidity providers within it . Client behaviour ranges depending on the instrument being traded . In comparison with other FX markets , swaps and forwards are traded less frequently . Within this market , liquidity providers noted that clients have become more reliant on personal and trusting relationships in H1 of this year .
“ It [ volatility and market conditions ] means that you need to have that partnership with the client and the salesperson and
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