Back-Seat Drivers

Who is driving this market?

The whole dynamic of the Foreign Exchange Market has changed over the past few years, this change has been been driven, almost exclusively by liquidity. Direct evidence of this can be found in the ever rising daily turnover estimates.

In 1980, global trade (according to the WTO) was almost two trillion dollars. In 2000, that number had risen to six point five trillion. Between 2008 and 2009 global trade fell from sixteen and a quarter trillion to twelve and a half! This was obviously the effect of the financial crisis. It has since recovered reaching a peak of nineteen trillion in 2014 before another fall in 2015 to sixteen and a half?

Enough numbers yet? No? Good. Let’s look at the FX market. In April 2016, turnover was five point one trillion a day.

So, that tells us that it isn’t merchandise trade that is driving the market. Services data is likely far higher than trade but even so, the market is turning over more than one hundred trillion a month.

Economic with the facts?

In years past, back when this PIG and his snout were busy sniffing out trade ideas it was economics that drove the market. That is to say pure data driven events. The currencies were distinguished by what their main drivers were. In the U.S., the dollar was driven by trade and then employment. Sterling was always housing prices and inflation. Germany (and therefore the Eurozone) was always inflation and monetary policy.

Look at the most recent two employment reports in the U.S. The March report saw a headline of 98k against expectation of 180k. April saw an adjustment lower to March to 79k. The headline was 211k again against an expectation of 180k. In years gone by March would have seen a 250 point move in the majors and traders eagerly awaiting the April adjustment. Now it’s barely worth returning from the pub for!

What of the carry trade? Buying a high yielder (AUD) and funding it by selling a low yielder (JPY or CHF). Far be it from me to rake over the ashes of so many traders accounts but the SNB wrecked that play. Taken for granted over a protracted period, the Swiss delivered a hammer blow which is still reverberating around the market.

Central Banks!  A law unto themselves? Not really since they are the law! Regulation can only take the market so far. If you want to see true action, watch the generally conservative Central Bankers when they want to punish a market that thinks it is in charge.

Not Enough Water Pressure? Call the bank...

I make no apology for being boring or having said this before.

Liquidity is what drives the Foreign Exchange Market now.

It is an intangible and doesn’t care about direction. It is almost counter-intuitive but the less control banks have over flow the more they make up for it with liquidity.

Banks control the spigot. It used to be Central Banks but not anymore. Banks have given up caring about direction. Of course, they still make money trading but the old fashioned “mine yours” cut and thrust no longer exists. The “barrow boys” of the seventies and eighties have been replaced by “nice boys” with degrees.The self-regulation of those earlier days is gone and now the tech savvy traders are being prosecuted for market manipulation. I find these prosecutions difficult to fathom. Of course, it is wrong to create a cartel but taking on a market trading one hundred trillion dollars a month?  It was wrong, of course to populate these chat rooms but eventually they would have run into a Soros or someone like him and it would have ended in tears.