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Strong start to autumn for most spot FX platforms

As autumn arrived, most spot FX platforms experienced an uptick in volumes, despite there being fewer trading days in September, compared to August. This is thanks to another month of turbulence in Italian politics, policy updates from the Federal Reserve and new US trade tariffs.

Amidst a busy trading month for financial markets, NEX reported a 2% increase in spot FX trading activity, with volumes increasing from $84.7 billion in July to $86.1 billion in September. However, on a year-on-year basis, volumes saw a significant 12% decline.

Thomson Reuters’ spot FX volumes grew 4.2% to $98 billion from August, but it too suffered a fall, dropping 4.8% when compared the same month in 2017.

Spot FX volumes on Fastmatch declined for the fourth month in a row, falling by 4% from $19.5 billion in July to $18.6 billion in September – its lowest figure of 2018. Year-on-year comparisons also show a decrease of 11.4%. Not good reading for a firm which has endured a period of difficulty following some very public staff changes.

However, it’s a cheerier story for Cboe FX, with spot volumes rising by 3.5% from August to $35.7 billion. Year-on-year growth was a healthy 8.1%.

But the biggest news continues to come from FXSpotStream, which reported an ADV of $31.9 billion, up 12.3% from August and up a huge 33% when compared to September 2017.

 

*All figures in US$

Insight

It was a strong start to Autumn for most spot FX platforms as they continued their recovery from the summer slump. They seemingly benefitted from a particularly busy news month, with plenty of column inches devoted to developments in the FX industry.

The main exception was Fastmatch. Its troubles continued as volumes dropped for the fourth month on the bounce. Euronext, which now owns 97.3% of the firm, and its founder and former CEO, Dmitri Galinov, continued their very public fallout in September. With a court case looming, it seems like headlines they could do without.

September also saw CLS’s long-serving CEO David Puth resign. A veteran of the FX industry, David played a key role in the development of the FX Global Code. Under his stewardship, CLS remained a safe pair of hands, with its core settlement service providing a unique level of safety and reassurance for trading 17 global currencies. We wish him all the best in his future endeavours.

Speaking of the FX Global Code, Edwin Schooling Latter, head of markets policy at the Financial Conduct Authority, said it is considering endorsing two voluntary codes: The Global FX Code and the UK Money Markets Code. This has put greater onus on senior managers to sign up. Expect a flurry of activity over the next few weeks.

Indeed, a report from NEX showed how its adoption has improved trading behaviour on EBS Direct, a relationship-based, disclosed platform, with a significant reduction in hold times, reject rates and a tightening of spreads.

All very positive, but it didn’t shed light on trading behaviour on its more popular, anonymous EBS Markets platform. Perhaps a second volume of the report is imminent?

Future predictions

It was reported in Bloomberg that Blackstone Group, the ownerof Thomson Reuters’ financial-and-risk arm, (also known as Refinitiv), is weighing a sale of FXall, a currency trading platform. According to people familiar with the matter it could fetch as much as $3bn.

Thomson Reuters has said it “remains a very strategic part” of its FX operations. Given the recent trend of exchange operators acquiring currency platforms to diversify their offerings, there is likely to be plenty of interest from potential buyers in the market.

Speaking of Refinitiv, confidential sources (OK, the FT…) also report that a rap song has been written by an employee to boost morale amongst staff.

In terms of currencies, the focus will be on the trade-weighted USD which continues to do well. Whether it can maintain this momentum is questionable, especially when investor attention eventually shifts to the bloating U.S. budget deficit and fading impact of the fiscal stimulus. The mid-term elections will also be in the back of their minds, with the outcome far from certain.

In Europe, the euro remains grounded by loose policy from the European Central Bank as well as a fair amount of political strife relating to Brexit and Italian politics. However, industry insiders believe it has the potential to bounce back over the coming year, particularly as investors start to expect an end to Fed tightening.

Foreign exchange in 2018: David Puth speaks to FX Week

Technology and regulatory guidance and principles will shape the foreign exchange (FX) market’s structure in 2018, according to David Puth, CEO of CLS, in an exclusive interview with FX Week.

2017 saw the publication of the FX Global Code, and a number of leading financial services and technology institutions confirmed their commitment to adopting and instilling its principles. This trend, Puth says, will continue in 2018 as the Global Foreign Exchange Committee publishes its final guidance on Principal 17 covering “last look”.

2018 will also be a year in which CLS expands its role offering new solutions to improve efficiency and reduce risk in the FX market.

“We are becoming more than a settlement utility. While delivering the risk mitigation that comes with safe settlement is our primary mission, we continue to focus on delivering products that solve client problems,” says Puth.

These include a same-day settlement service for five of the world’s most liquid currencies, and its much-anticipated distributed ledger technology (DLT) enabled netting service, CLSNet.

These technologies will likely have a significant impact on FX market structure, helping it to become more efficient and speed up the movement of currency around the world.

For more on what 2018 holds for FX, including David’s thoughts on the dollar and bitcoin, read the full interview here.

Defining the FX Flash Crash

On the 15th January 2015, the euro crashed 20% against the Swiss franc in a matter of moments, before recovering rapidly. Similarly, on 7th October 2016, sterling plunged in value by over 9% against the dollar, again regaining most of its value minutes later.

These are amongst the most famous examples of the market phenomena know as the ‘flash crash’, but they are by no means the only examples. In fact, according to a study by algorithmic trading technology provider, Pragma, which aims to help monitor and track the prevalence of flash crashes, there were some 69 flash crashes in 2015 and 2016. Almost one a fortnight.

The causes of these market phenomena are unknown. It has been suggested that flash crashes are the result of ‘fat-fingered traders’ or lapses of human judgement. After the pound sterling incident, the Bank of International Settlements (BIS) released a report which suggested technical error as a possible cause.

However, as most research has considered these events as of one-off incidences, drawing generalised conclusions has been difficult. Without other flash crashes to compare, it is not possible to tell which variables in a complex market are contributing to the crash and which were incidental. For example, some commentators have suggested that a principal cause is algorithms overreacting to news events, but further study has found no particular correlation between other flash crashes and news events.

This is where Pragma’s research is vital. It has analysed two years of tick by tick foreign exchange data to identify and catalogue all instances of flash crashes across numerous major currencies between 2015 and 2016. To do this, it has developed a precise, quantitative definition of the flash crash.

Previously, the BIS described a flash crash as a ‘large, fast, V-shaped price move and a sudden widening of bid-offer spreads,’ the V-shape implies a reversion of the price after the initial price move. Pragma’s definition builds on the BIS’s and defines a flash crash as having a:

  • Large price move ( 13x than normal price volatility)
  • Widening bid-offer spread 2x normal)
  • Strong price reversion ( 70% price reversion)

Using this standard, the examined time period had 69 instances of what would be considered a flash crash.

This dataset allows industry analysts and academics to more accurately examine the causes of flash crashes and what effects such as changing technology, regulation and industry practices are having on market quality going into the future.

For now, the causes of flash crashes remain unclear. But Pragma’s research provides an important foundational step in moving the market towards a more full understanding of this market phenomena.

For more information, you can request Pragma’s research report here. You can also read more about the report on Bloomberg and Reuters.

A Reuters bon voyage… and welcome

So it’s bon voyage to Reuters’ Patrick Graham who is moving to India after almost four years covering the FX market.

Patrick covered the largest and most liquid financial market from its main trading centre in London through a period of profound change.

He now heads to Bangalore, where he will be overseeing over forty journalists at Reuters’ largest news bureau.

Chatsworth has worked closely with Patrick for many years and we wish him well as he embarks on this new stage of his career.

We also extend a warm welcome Patrick’s colleague Saikat to London, as joins the London FX team from his previous role covering Asian financial markets.

Cobalt closes investment from former Deutsche Bank COO Henry Ritchotte who also joins as Strategic Advisor

Cobalt, the FX post-trade processing network based on shared ledger technology, has closed an investment from Henry Ritchotte, the former Deutsche Bank COO who will also become a member of Cobalt’s strategic advisory board.

Henry Ritchotte spent over two decades at Deutsche Bank where he was a member of the Management Board and Group Executive Committee acting as Chief Operating Officer and Chief Digital Officer. Since leaving the bank at the end of 2016 Henry established RitMir Ventures, a principal investment firm focused on investing in products and services transforming finance through disruptive regulatory and technology driven business models.

Cobalt delivers a private peer-to-peer network that significantly reduces post-trade costs and risk for institutions operating in today’s FX markets. The platform is designed to create a single, shared view of a transaction on shared infrastructure and allows clients to reduce reconciliation and operational costs by up to 80%. With its production beta now live, Cobalt is ramping up to launch its live platform later this year.

Adrian Patten, Co-Founder of Cobalt, comments: “Henry’s investment reflects the increased interest our platform is receiving from the wider financial industry. With our innovative technology and his experience and knowledge, we are strongly positioned to redesign post-trade.”

Henry Ritchotte, Founder of RitMir Ventures, comments: “There has been comparatively little investment in post-trade over the past few decades. Cobalt’s network is an elegant solution that provides significant benefits for users and will reshape the industry as we know it. I look forward to working with the leadership team on their fresh approach to the post-trade challenges shared by all FX participants.”

ECB publicly endorses FX Global Code

The European Central Bank (ECB) has become the latest central bank to endorse the Bank of International Settlements’ (BIS) FX Global Code, joining others including the New York Federal Reserve and the Reserve Bank of Australia. This signals that currency-trading institutions who do not sign up may well find their counterparties limited in future.

Whilst the ECB did not issue a legal mandate for its currency market counterparties to sign up to the Code, market participants have been invited to publicly declare commitment to the Code by May 2018, one year on from its publication. It is clear that the central banks are taking the Code very seriously, and rightly so.

The Code sets out a comprehensive set of best practice guidelines which outline how all market participants, regardless of institution type, should behave in order to uphold the highest standards of transparency and ethics in the wholesale FX market.

Since the final version of the Code was published two months ago, many institutions have already committed to adopting it. Those that haven’t will likely be spurred into action by the ECB’s firm encouragement.

This advocacy for an important set of principles is to be welcomed.

Chatsworth congratulates Pragma and Cobalt on FX Week e-FX Award wins

Leading industry trade publication FX Week has announced the winners of its prestigious e-FX Awards, which included two of Chatsworth’s foreign exchange clients.

The awards recognise firms from across the foreign exchange industry for their excellence and innovation in the world’s most liquid financial market.

Announcing the award winners, FX Week editor Eva Szalay said technology in the market was “booming”, pointing out that “innovation has been extended to small start-ups, as well as the largest players” and highlighted the market’s “genuine desire to become more transparent, more competent and highly innovative”.

Innovation was certainly in evidence from algorithmic trading technology provider Pragma Securities, which was named Best independent algorithmic trading technology provider, and post-trade distributed ledger technology company Cobalt, which was awarded e-FX initiative of the year award.

Pragma

Reflecting on the increasing sophistication amongst the buy-side and the push for best execution in FX, Pragma has seen rapid growth and expansion over the past 12 months.

The company serves banks, brokers and sophisticated buy-side institutions, and identifies its value proposition around transparency and control as differentiating features.

It added a number of new capabilities to its Pragma360 algorithmic trading platform. This includes algorithmic trading non-deliverable forwards (NDFs), which offers traders better execution when investing in popular emerging market currencies.

It has also expanded its international client base through a new connectivity presence at Equinix’s LD6 data centre in London, providing lower latency connection to London based FX matching engines.

Cobalt

Cobalt has a very eye-catching proposition – it uses distributed ledger technology to cut 80% of the costs of post-trade reporting.

Founded by former Traiana executive Andy Coyne, and Adrian Patten, the company is offering to completely revolutionise the costly and time-consuming way in which post-trade FX services are conducted, cutting out duplication by storing records of all transactions on a single distributed ledger.

“I think if we are successful, the biggest impact will be on trading and Cobalt will increase volumes. Post-trade costs are a tax on trading and the idea that you can charge someone 50 cents to a buck for sending an unencrypted message to the back office is ridiculous.

“So if we can reduce those costs by dollars per transaction, that will feed into increasing volumes,” Patten tells FX Week.

The team at Chatsworth would like to congratulate both Cobalt and Pragma on their well-deserved award wins.

Chatsworth supports global push to restore trust to the world’s largest financial market

 

Foreign Exchange is the world’s largest and most liquid market and it has taken a repetitional battering over recent years.

Now the final part of the Bank of International Settlements’ (BIS) FX Global Code has been published, following a two-year, industry-wide effort to rebuild trust in the FX market following a series of scandals and market challenges over the past decade.

The Code sets out a comprehensive set of best practice guidelines which outline how all market participants should behave to uphold the highest standards of transparency and ethics in the wholesale FX market.

Chatsworth is proud to have played our part through our work with CLS and its CEO David Puth – Chairman of the BIS’s Market Participants Group and one of the principal authors of the code. This included an extensive engagement campaign to educate the press and FX market on the Code’s aims and objectives.

More than 1,500 people have had input to the Code and have helped to shape a set of high-level principles that will impact their day-to-day business practices.

The final document has received widespread support across the FX industry. A number of industry participants – banks, platform providers, technology vendors and trade associations – have backed it.

Now it is the time for the FX industry to adopt the Code’s principles and all FX professionals to read, understand and apply it to their everyday trading and transactional activity.

David Puth speaks to Bloomberg TV about the Code

 

The potential benefits for corporates in algorithmic trading

Curtis Pfeiffer, Chief Business Officer at Pragma Securities, explains to FX-MM how corporates could stand to benefit from using algorithms for FX execution.

Why should corporates consider using algorithms for FX execution?

Corporations want to maximise profit, and a penny saved is a penny earned. Algorithmic trading can contribute to the bottom line by significantly reducing FX trading costs. Corporations trade on the order of $70 trillion a year – roughly the same as the total global GDP. On such large amounts, basis points matter.

That’s why, to fulfil their mission, corporate treasurers are increasingly focused on ensuring that they get best execution on their FX transactions, which includes using the best available trading tools and practices.

What advantages do algorithms have over other trading techniques?

With the speed at which trading is conducted today, the proliferation of trading venues, and sheer levels of information that is processed, it is simply impossible for a human trader to stay on top of all the data that the market is generating.

There are four core benefits to algo execution:

  • Breaking up a large order into multiple smaller pieces means, on average, paying less than trading in a block
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Algorithms have the ability to provide liquidity as well as to take prices, allowing patient traders to capture part of the bid-offer spread
  • Automation frees treasurers and traders to focus more of their time on those issues where human intelligence and judgement add the most value.
What factors should investors consider when choosing an FX algorithm?

First, corporations should understand the bank’s liquidity model for their algorithmic offering – principal, agency or hybrid.

Bank algos access liquidity differently depending on the model. A pure principal algo accesses just the host bank’s liquidity, which also provides indirect access to other liquidity pools in the marketplace. Agency models do not interact with the host bank’s liquidity, but are able to provide liquidity on ECNs as well as taking prices, potentially capturing part of the bid-offer spread for the customer.

Hybrid models can offer the best of both worlds, though customers should understand how the bank manages its dual role as principal and agent. Corporations should assess the liquidity pool underlying each bank’s algorithms to determine which model will be most effective.

Second, corporations should be satisfied that their bank provider has first class algorithmic trading tools – either through a major investment it has made in algorithmic trading research and development internally, or by partnering with an algorithmic technology specialist. Smart algos have sophisticated order placement logic, change their behaviour based on pair and time-specific liquidity patterns, and make intelligent and dynamic use of the real-time liquidity available across venues – for example based on order fulfilment rates.

Provided liquidity and investment checks out, corporations can consider algorithmic trading as another service their banks provide, and direct flow as part of the overall banking relationship.

Finally, best practice is to use TCA after the fact to track performance across bank providers and make sure all is as expected.

To read more, please visit the FX-MM website here.

Sterling reigns over euro amongst central banks

Central banks view the UK as a safer prospect for investing their currency reserves, despite the uncertainty created by the Brexit vote and Article 50.

That was the key revelation from a survey of reserve managers at 80 central banks, conducted by trade publication Central Banking and HSBC.

According to the FT, concerns over political instability, weak growth and negative interest rates mean reserve managers consider sterling as a long-term, stable alternative to the euro.

This is significant for several reasons. Firstly, reserve managers at 80 central banks are responsible for investments worth more than GBP 5.1 trillion and are tasked with ensuring the value of their domestic currency is maintained. Their decisions will be closely followed by currency traders and investment managers around the world. 

Secondly, sterling’s post referendum plunge was widely noted last June. However, it gained against the US dollar during the first quarter of 2017 – the first quarterly gain since June 2015 – and the bullish bets from central banks suggests a further upward correction is on the horizon. 71 per cent of respondents said the attractiveness of the pound was unchanged in the longer term.

The prospect of an imminent resurgence in sterling is backed by analysts at leading investment banks, which predicted an unwinding of near-record bets against sterling if a constructive tone was adopted by the UK and Brussels continued over Brexit negotiations. Japanese bank Nomura in particular, believes the pound is undervalued against the dollar by as much as 25 per cent.

Thirdly, the survey’s findings highlight concerns over the stability of the monetary union, which was identified as the greatest fear for 2017 for reserve managers. Some central banks have reportedly cut their entire exposure to the euro, unprecedented for the world’s second most popular currency, while others have reduced their holdings of investments denominated in euros to the bare minimum.

The survey found that the ECB’s negative interest rate policy was also key factor causing bearishness on the euro. The policy was designed to boost growth across the Eurozone but has impacted profits at banks and financial institutions across the Eurozone.

While these conclusions give reasons for both optimism and trepidation – it’s a matter of perspective, after all – they highlight the fluid and interlinked nature of politics and the currency markets.

More than GBP 3 trillion of currencies are traded every single day around the world, and its impact stretches far beyond the trading floors of the largest international banks. 

Currency movements affect everything from individual pensions to the cost of daily household goods, and with politicians on both sides of The Channel spinning dealing with multiple, complex challenges, currency markets will listen intently to their every word. 

Brace yourself for a period of excitement, nervousness and volatility over the next 24 months.

London’s post-Brexit future as a financial hub

UK Prime Minister Theresa May finally triggered the formal process for Britain leaving the European Union (EU) on March 29.

While the EU referendum and a post-Brexit scenario may have been something of a blow to confidence in the City, it still has plenty going for it as a financial hub. This year’s Global Financial Centres Index, an international ranking of the world’s leading financial centres, placed London top of the pile.

“London’s rating has been influenced by not knowing what will happen after the UK’s departure [from the EU],” Mark Yeandle, associate director of Z/Yen and author of the report, told The Financial Times. Despite this, London remains top of the list and, over the period which the report tracks, has even recovered some ranking points.

London also remains the world’s biggest FX market by a huge margin, according to the latest BIS Triennial report. While Brexit may result in some jobs being relocated, the industry still believes London will remain front and centre and a key financial hub.

One of the key factors which will insulate London’s FX market is its concentration of trading infrastructure and activity. “When trading becomes concentrated in a particular region and is supported by a comprehensive legal and regulatory environment it develops natural strengths that enable that particular market to function well.” says Dan Marcus, CEO of ParFX, talking to Finance Magnates. “By leaving that pool of liquidity, a firm could disadvantage themselves and their clients.”

This means that, far from vacating the city, many businesses are investing further in London’s future.

Algorithmic trading technology provider Pragma is one such company, with the New York-based firm expanding its equities and FX business to London. “Our investment in the data center at Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally,” says Pragma’s Chief Business Officer, Curtis Pfeiffer.

“Despite the uncertainty caused by Brexit, we are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” he explains.

While nothing in the negotiations has been determined at this early stage, the City will also weigh up the potential challenges of Brexit.

Continued access to the European single market through financial passporting and the ability to attract skilled technology professionals from across the EU to work in London top the list for many institutions.

“77% of my staff in London were born outside the UK. We need those people. People are very mobile. I just worry that tough negotiations will send the wrong signal.” Michael Kent, CEO of remittance service Azimo, told Financial News.

In addition, J.P. Morgan has reportedly spent the last nine months weighing up various EU cities as a potential new continental home for their operations, according to The Wall Street Journal.

Looking beyond the headlines, however, the picture is more nuanced. Most of the relocation plans announced over the past few months involve relatively small numbers of staff. For many banks and financial institutions this may be a hedging exercise rather than a wholesale exodus.

Going forward, the UK government is determined to ensure London remains a central part of the international financial landscape, and it’s worth remembering London has a number of strategic advantages which mean it is likely to continue to be the city of choice. It uses the global language of business, English; it is situated in the perfect timezone between Asia and America; and has a legal system that is world-renowned for clarity and reliability.

None of this will change; in fact, it will continue to ensure London remains open and attractive to business.

In search of FX liquidity

Foreign exchange (FX) is one of the world’s most liquid markets, with around USD 5 trillion exchanged across borders every day.

However, there is a perception in the market that liquidity is on the wane.

This is not necessarily true, according to David Puth, CEO of CLS. Speaking to Euromoney, he said “There is a tendency for market participants to believe that liquidity was better in the past. From what we see at CLS, liquidity appears to be very strong. It is, however, different, with liquidity widely dispersed over a number of different trading venues.”

The pessimism may in part be as a result of the increasing difficulty in defining exactly what liquidity means in the modern market, and measuring it accurately.

This was one of the questions which a recent report on liquidity in the Americas from the Bank of International Settlements (BIS) attempted to address.

Traditional liquidity metrics, such as cost metrics, quantity metrics and trade impact, have their uses, but the report finds that none are a perfect way to measure liquidity in the modern market.

This is important because one thing which is clear is that the modern FX market is becoming increasingly complex, making understanding liquidity more difficult.

The market, like many others, is fragmenting as electrification proliferates the number of trading venues and sell side participants put more emphasis on internalising trades.

Whether this fragmentation is having an impact on traders ability to trade, remains an open question.

The BIS report indicates that fragmentation does appear to be having some impact on liquidity measures, particularly when it comes to periods of market stress.

It gives examples such as the 2016 British EU referendum and flash crashes, where traditional liquidity metrics appear to have been impacted across a number of currency pairs, at least over the short term.

Dan Marcus, CEO of ParFX, points out that sometimes individual metrics don’t always give the full picture. “It may be the case that volumes are down from where they were… [However] on ParFX we do not see evidence of a problem with market depth or the ability for traders, who need to trade, fill orders.”

This is in part because, while technology is driving fragmentation, it is also creating opportunities to aggregate liquidity in more efficient ways.

“Buy-side traders have responded [to FX market fragmentation] by turning to algorithms and taking on more execution risk themselves”, says Pragma’s CEO David Mechner.

Liquidity is the lifeblood of the FX market, it is vital that the market can measure it in a way which gives an accurate representation of what it is like to trade. One solution, suggested by Mechner, is a consolidated tape, much like in equities. Until then, the market should think carefully about the metrics used to measure the market and ensure they are fit for purpose.

Adherence to FX Global Code will reform conduct and behaviour

As we near the final stages of the development of the foreign exchange (FX) Global Code, the ACI Financial Markets Association (ACIFMA) is leading efforts to support education and adherence. We will start by making commitment to the Code mandatory for ACIFMA members, and encourage members to prove their adherence in future. This could prove to be a turning point in reforming conduct and behaviour in foreign exchange, writes Brigid Taylor in FX Week.

As a member of the MPG, ACIFMA has both contributed and witnessed the extent to which market participants and policymakers have engaged, discussed, debated and worked together in the best interests of the wider market. This is an industry that transacts more than USD5 trillion of currencies across borders every single day. Its ability to operate smoothly is crucial to the international economy.

There was of course a broad range of views on how best to address a series of topics, such as governance, information sharing, last look and pre-hedging. An array of views is expected in any large consultation, but consensus has been achieved with the best interests of the market in mind.

The final Code will, in my view, outline principles and guidance that is effective, appropriate and strike the right balance. I expect it to act as an essential reference for market participants when conducting business in the wholesale FX markets and when developing and reviewing internal procedures.

Hardwiring adherence – the third objective

This brings us to the final objective set out at the beginning of the process: develop proposals to promote and incentivise adherence to the Code.

For this to happen, it is essential that individuals (i) commit to adhering to the Code; (ii) receive the appropriate training and education so they are clear on what is expected and understand how to comply; and (iii) sign up to a solution where senior managers are able to observe and address any training and educational gaps amongst their subordinates.

This is where the ACI Financial Markets Association (ACIFMA) can play a central role. With a track record in delivering training, education, attestation and best practice principles that stretches back more than half a century, we represent more than 9000 individuals in 60+ countries.

There are several ways we intend to achieve this. Firstly, we will make it a prerequisite for individuals to commit to adhering to the FX Global Code as part of their membership. This means a meaningful proportion of the market – over 9,000 FX professionals around the world – will sign up immediately after the code is launched and commit to understanding, implementing and abiding by the new principles.

There is an urgent need to restore ethics in financial markets and the FX market is aware of its responsibilities to its clients and stakeholders. The significance of the enormous effort undertaken over the past three years should not be underestimated; to date, the level of leadership and engagement has been exemplary. I expect the FX Global Code to be a turning point in reforming conduct and behaviour in foreign exchange and develop a renewed sense of trust in this important sector of any economy.

To read the full article by Brigid, please visit the FX Week website here.

Algo trading on the rise as Pragma establishes European presence

The decision by Pragma to set up a base in London shows how the UK’s capital remains the natural hub for algorithmic currency trading despite the UK’s looming exit from the European Union.

While the debate about the future of London in a post-Brexit environment continues to rage on, there are many who continue to recognise the role of London at the centre of the USD5 trillion currency market.

Algorithmic trading in particular continues to rise in popularity. A report from Greenwich Associates found that the proportion of volume-weighted FX trading executed algorithmically has increased two and a half times in the past three years.

This trend was further highlighted by Pragma Securities, the multi-asset class provider of algorithmic solutions, which established a new connectivity presence in London to service its growing international client base.

London currently accounts for more than a third of all currency trading activity globally, according to the BIS. In a news article in FX Week, David Mechner, CEO of Pragma, expressed confidence in London and its role at the centre of European and international financial markets.

“Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally.

“The banks we service need state-of-the-art trading capabilities for their traders, and buy-side and corporate clients, making LD6 a natural fit.”

Pragma is not alone in its bullishness on London’s future, and it is clear that maintaining a data centre presence remains crucial to an institution’s trading operations, particularly for FX trading. The Financial Times recently reported on Dutch data centre operator Interxion’s £30m investment in its site in London’s Brick Lane.

Curtis Pfeiffer, Chief Business Officer at Pragma, also highlighted the benefits of proximity to London and risks of leaving London’s FX ecosystem.

“We are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” said Curtis.

“Institutions will be reluctant to leave the data centre ecosystem in London, which has increased in size significantly over the last 10 years as a result of a network effect – everyone wants their trading servers to be where everyone else’s are. By leaving that ecosystem, a firm could disadvantage themselves and their clients.”

Algo trading and interest in emerging market currencies will grow in 2017 driven by hunt for FX liquidity

Traders at across both buy and sell side are reporting that they plan to make more use of computer algorithms to trade FX in 2017 and are also setting their sights on traditionally less-traded currencies.

This matters. Foreign exchange – or FX – is the world’s largest and most liquid market, with around USD 5 trillion exchanged every day across borders.

FX underpins global trade and commerce, allowing countries, companies and institutions to trade, hedge and transfer risk.

Now a survey of over 200 FX trading institutions reveals that while 12% currently use algorithms, 38% plan to increase their use of algos in 2017.

JPMorgan believes 2017 is going to be “a watershed year for algo usage”.

In terms of currency mix, traders currently spend 70% of their time trading the major G10 currencies – including EUR, USD, GBP and JPY – and 26% in emerging markets.

This looks set to change in 2017 with 15% planning to increase their use of G10 currencies this year, with 32% planning to trade more emerging market* currencies as their liquidity continue to improve and they therefore become increasingly more attractive to trade.

So it’s no longer just about speed and a race to the bottom to be first in and out of the market – so called ‘bad algos’ beating everyone to the punchbowl.

The unifying theme of both the rise of the machines and the renewed interest in traditionally ‘less traded’ currencies is the search for liquidity in an increasingly fragmented and competitive market.

Algos can monitor and act across multiple venues, markets and currency pairs to flag opportunity or alert to risk.

Likewise, an uncertain macro-economic outlook plus improving liquidity makes trading in less-traded pairs much more attractive.

As the first signs of Donald Trump’s victory in U.S. presidential elections emerged the largest increase in currency pair activity was the U.S. dollar traded against the Mexican peso (USD/MXN), 63 times normal levels in the hour following the result.,

By way of comparison, spikes were also registered across the major currency pairs with input volumes ten times normal levels for EUR/USD for that hour, followed by USD/JPY and GBP/USD.

Turning to FX instrument type,40% of FX traders report that they plan to use more options in 2017, with a corresponding increase in cash, swaps and NDFs as hedging tools in an uncertain political and economic environment.

*On the whole at Chatsworth we’re not so keen on the term ‘emerging markets’ which is largely subjective and frequently inaccurate as many ‘emerged’ long ago.

All FX Eyes on BIS Triennial Survey

The whole FX industry is watching for the Bank for International Settlements’ Triennial FX Survey results, due this afternoon at 2pm GMT.

Why does it matter? Chiefly because it is the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria.

It’s a reality check for everyone with skin in the game. It tells us what currencies are trading the most, where and by what means.

It also gives us a sneak peek at the real market share of the FX market transacted on the electronic platforms and through voice trading.

When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes.

USD and EUR remained unchallenged as the most traded currencies, but the renminbi gained strong ground by moving into 9th place on the list. It will inevitably be higher on this occasion.

Since then, the market has experienced the SNB revaluation, issues around conduct and interest rate divergence among the major central banks.

Some established currency trading venues also lost market share and were hampered by reduced trading volumes. This points to a number of themes. Firstly, internalisation of trades at banks; secondly, a drop in overall volatility and trading opportunities; and third, greater competition from upstart trading venues, who grabbed a piece of the FX pie.

The position of the banks as the main FX trading posts is also being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s survey.

This continues the trend evident in past Triennial Surveys. The counterparty segment that contributed the most to growth in global FX turnover between 2010 and 2013 included smaller banks that do not act as dealers, institutional investors, hedge funds and proprietary trading firms as well as official sector financial institutions, among others.

In the 2010 survey, this segment surpassed other reporting dealers (i.e. banks trading in the interdealer market) as the main counterparty category in the Triennial Survey for the first time.

What this shows is that the funds and HFTs are established as major players and are cleaning up their act to become genuine makers and takers in the market. This is an inevitable evolution and blurring of the buy and sell side.

This afternoon we expect the BIS to report relatively flat volumes, if not a dip on 2013. The gallery of top traded currencies will remain broadly the same but the devil will, however, be in the detail and the percentage movements showing direction.

There is will be many things to look out for. Which currencies were the most traded? Will London retain its FX crown? Which instruments were the most popular?

All will be revealed in the next few hours. The industry awaits…

Business as usual for London’s FX industry post-Brexit

No signs of exodus to other financial centres as FX recruitment holds firm.

Following the UK’s vote to leave the EU, European financial centres such as Paris and Frankfurt prepared to roll out the red carpet for London’s financial institutions. But this may be more difficult than initially anticipated.

Red tape regulations, heavier personal tax regimes, governmental issues and different social norms means there is little appetite for London’s foreign exchange (FX) trading institutions to move jobs to Europe en mass, according to recruiters keeping close tabs on London’s financial district.

Despite the Brexit vote, and repeated reports about banks accelerating plans to move jobs from the UK, European cities are struggling to match the pull factors that London offers.

London has long been at the heart of the international currency markets, accounting for more than 40% of FX turnover, according to the Bank for International Settlements. With its advanced infrastructure, access to human capital, a strong legal and regulatory system and a time zone that allows London-based traders to service customers all over the world, it has not only maintained its dominance but also attracted a host of emerging fintech companies to form one of the largest technology and innovation hubs in the world – further strengthening the City’s dominance.

All of this means the number of suitable alternatives to London is limited.

In an article for Euromoney, Andrew Kitchen, internal audit manager at recruitment consultancy Morgan McKinley, says there has been no increase in the number of people from the leading banks looking to leave the UK since the EU referendum vote.

This may be because transferring large numbers of FX staff to France in particular will not be a straightforward process, adds Raoul Ruparel, co-director of Open Europe. “Culturally and socially, France has taken a different approach to the UK in relation to this type of business in recent years,” he says. “It remains to be seen whether they have the appetite to offer tax or regulatory incentives.”

French employment and personal tax regimes are also likely to be a factor that counts against Paris, according to James Coiley, a partner at law firm Ashurst. “Making overtures to FX banks and traders to relocate to Paris may not play well with supporters of the socialist French government.”

However, the uncertainty seems to have stopped some banks from transferring jobs from mainland Europe to London, according to Kitchen. “What we are seeing is that several candidates based in Europe who had hitherto been looking to relocate to London are now staying put. This is in part due to the level of uncertainty around future Brexit implications, but also the current weak value of the pound,” he warns.

So while the outlook for 2017 remains unclear, London’s FX industry continues to remain resilient in the face of uncertainty and there has yet to be any knee-jerk reactions that disrupt the status quo on either side. Although it is still early days, what is clear is that fears over London losing its FX crown remain largely unfounded for now.

The City now looks to politicians with bated breath.

Daily traded currency values from banks and funds around the globe hit USD 4.96 trillion in April

A surprise from the global currency markets which have been in something of a state of flux of late.

Daily average value submitted to the CLS global settlement system hit USD 4.96 trillion in April, up 5.7% from the previous month, and up 6.9% from the USD 4.64 trillion in April 2015.

Volumes have been below USD 5 trillion a day for most of 2016 so far but the new CLS figures show that April was the busiest month this year.

And this April matters a great deal because the month’s trading activity feeds into Bank of International Settlement’s triennial survey of the foreign exchange market released in September.

The survey is the most holistic picture of global FX market activity, showing detailed activity broken down by trading centres, counterparty types and currency pairs.

The global currency markets remains in a state of flux. Diverging monetary policy, changes in liquidity provision, venue usage and the profile and diversity of trading counterparties are all factors changing the shape of the market.

Take trading venues. Despite the uptick in month on month CLS settlement activity in April, trading volumes actually fell on some of the major trading platforms.

EBS reported USD 82.3 billion last month, which was actually a drop of 15% on the USD 96.9 billion last year recorded in April 2015. It was a similar picture over at Thomson Reuters.

Pragma launches SmartFix algorithm to improve FX trading performance against WM/R 4pm

Pragma Securities, a leading provider of high performance algorithmic trading tools, has launched a sophisticated algorithm designed to improve average execution performance against the daily 4pm WM/Reuters foreign exchange benchmark fixing.

Following recommendations from regulators in the wake of the FX rate-rigging scandal, in February 2015 the methodology underpinning the WM/R benchmark was changed, widening the calculation window from one minute for the most liquid currencies to five minutes.

In addition, banks have largely shifted their execution of customer fix orders from the spot desk to their electronic desks, where time-weighted average price (TWAP) execution algorithms are often used.

Pragma’s research highlights that together, these changes have created predictable patterns that can be leveraged to improve trading performance using only publicly available data. The full research findings are available via the Pragma Securities website.

Pragma’s new SmartFIX algorithm is built on the firm’s own research, which has identified predictable patterns of trading behaviour around the key FX benchmark.

The algorithm observes only publicly available information, and adjusts its trading rate in a systematic way based on those observations to achieve better execution on average for traders benchmarked to the Fix. In addition, these dynamic adjustments are layered on top of a proprietary trading schedule that achieves lower tracking error against the benchmark than a simple TWAP

David Mechner, CEO at Pragma Securities comments: “For traders that are constrained to match the fixing rate, our algorithm can reduce risk relative to a simple TWAP, and can also improve execution quality for a modest increase in risk. This makes it a good tool for banks servicing customer fix orders whether in a principal or agency manner.”

The new algorithm complements Pragma’s existing foreign exchange platform offering, Pragma360, which includes a suite of execution algorithms, transaction cost analysis (TCA), risk controls, and a next-generation algorithm monitoring system called Panorama. Pragma360 is provided as a broker-neutral trading solution to banks and asset managers.

London’s leading position as a USD 2.2 trillion hub for FX trading would be harmed by a Brexit, according to poll of currency market professionals

London’s position as the world’s main currency trading centre would be threatened by a British exit from the European Union, with Frankfurt, Paris, New York and Dublin likely to be the main beneficiaries, according to a survey of foreign exchange (FX) market professionals.

As reported in Bloomberg and Reuters, the research team at Chatsworth Communications polled 12,000 members of the ACI Financial Markets Association, the largest global trade body representing the international currency markets, for their personal views ahead of the UK Referendum vote on 23 June.

Key findings:

  • Two-thirds (65%) of respondents believe a UK vote to leave the EU would negatively affect London’s position as the world’s largest FX trading centre, while 13% believe a Brexit would have a positive impact.
  • Of those concerned about the negative impact on London, more than 70% identified Frankfurt as the trading centre most likely to benefit from a Brexit, followed by Paris (49%), New York (40%) and Dublin (28%).
  • 80% of all respondents believe the UK will vote to remain in the EU.

London’s dominance of the foreign exchange market has grown exponentially as the size of the market expanded, and is, by far, the largest and most established centre for currency trading. Nearly 41% of global trading goes through London, more than double the market share of New York, according to data from the Bank for International Settlements (BIS)*.

Currency trading increased globally to an average USD 5.3 trillion (GBP 3.8 trillion) per day in 2013. The vast majority (75%) occurred in five jurisdictions: London (41%), New York (19%), Singapore (5.7%), Japan (5.6%) and Hong Kong (4.1%).*

 

Detailed findings:

A UK vote to leave the EU will…

  • Positively affect London’s position as the world’s largest FX trading centre: 13%.
  • Negatively affect London’s position as the world’s largest FX trading centre: 65%.
  • Have no effect: 22%.

How do you think the UK public will vote?

  • The UK will vote to remain in the EU: 80%.
  • The UK will vote to leave the EU: 20%.

Which global trading centres do you think will benefit the most if the UK votes to leave (NOTE: answered only by respondents who believe a Brexit will have a negative impact on London)?

  • Frankfurt: 71%.
  • Paris: 49%.
  • New York: 40%.
  • Dublin: 28%.
  • Zurich: 14%.
  • Hong Kong: 8%.
  • Singapore: 7%.
  • Geneva: 7%
  • Dubai: 4%.
  • Tokyo: 4%.

How long have you worked in the FX industry?

  • Less than one year: 0%.
  • 1-2 years: 9%.
  • 3-5 years: 10%.
  • 6-10 years: 16%.
  • 11-15 years: 17%.
  • 16-20 years: 18%.
  • More than 20 years: 30%.

Global FX bounces back to over USD 5 trillion in February

February was a tumultuous time for financial markets, with high volatility influenced by the threat of a potential Brexit and ongoing turmoil in the Chinese economy. 

CLS, the global FX settlement utility has released its settlement data for February showing average daily input value was USD 5 trillion up 3.3% from USD 4.84 trillion in January 2016.

Some FX platforms reported a month-on-month decline in daily spot trading volumes. 

Average daily volumes at EBS were USD 102.6 billion in February 2016, down 1% from the January 2016 reading of USD 103.8 billion.

Read the full report in Reuters

ECB Sets Table for Lower Euro Prices – Here’s How

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“The European Central Bank’s (ECB) patience with the region’s lacklustre recovery may be running out, if one is to believe the rhetoric deployed by President Mario Draghi at the April press conference. Although the ECB held its main refinancing rate on hold at 0.25%, a record low, it was clear that the downturn in economic data over the past several weeks, highlighted by the headline March CPI figure coming in at +0.5% y/y, a four-plus year low (and far beneath the ECB’s medium target of +2%) has changed the game.

 

“There were several tweaks in ECB President Mario Draghi’s tone on Thursday that suggested a more dovish consensus is forming among the Governing Council Members. It was made clear that the council voted unanimously to explore the use of unconventional monetary policy measures, even as President Draghi noted that all the conventional tools hadn’t yet been deployed. Negative interest rates and a round of the ECB’s own version of quantitative easing (QE) was discussed.

 

“The implication that the ECB stands ready to act in the face of a deflating price environment and soft economic horizon inherently suggests an air of credibility to the idea that the ECB could implement non-standard accommodative policy measures. In meetings past, any such commentary that implied the desire for a weaker Euro or hope for continued improvement in growth was met with skepticism by the market; the Euro had developed the reputation for bouncing back after the past several meetings, including the November rate cut (an important low for EURUSD formed that day).

 

“Now that it’s been made clear by the ECB that it recognizes jawboning is losing gravitas – threats of action but no such specific action (see: the ECB’s success with bringing down PIIGS sovereign bond yields without having to operate within the scope of the OMT, not even once) – the path forward will require more explicit details of what measures the ECB might take going forward.”

Cracks emerge in largely positive US Consumer Confidence Index

 

 

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“Winter’ inclemency may or may not be impacting the US economy but US consumers are thus far weathering the weather. The Consumer Confidence gauge dropped to 78.1 in February from 79.4 in January, but the Present Situation subcomponent climbed to its highest level over the past 12-months at 81.7. The Expectations subindex dropped to 75.7 from 80.8, but remains above the lows set near 71 around the October fiscal hot stove.

 

“This data suggests that American consumers retain their positivity about the economy, but the recent patch of weakness seen the past few months is starting to erode hope. Considering that Americans feel that their current situation is improving steadily, any drop in consumption data seen from December to February could bounce back once warmer, more amicable spring weather arrives.”

 

 

 

Markets bogged down by lacklustre economic calendar

 

 

Ilya Spivak, Currency Analyst at DailyFX, comments:

 

“Markets are off to a slow start in the opening hours of the trading week. A lacklustre economic calendar offers little by way of market-moving event risk, opening the door for big-picture themes to take centre stage. That puts the spotlight on Fed policy considerations, where another busy week of “Fed-speak” including testimony from Chair Yellen likely to talk up QE cutback continuity. A variety of US economic activity indicators from regional Fed branches as well as reports tracking housing, consumer confidence and durable goods orders are also on tap.

 

“Steady underperformance relative to median forecasts on US economic outcomes hints analysts continue to underestimate the severity of the slowdown in the world’s largest economy, opening the door for another round of downside surprises. Where last week the toxic mix of Fed stimulus withdrawal and mounting growth concerns marked a break in sentiment’s recovery, the same dynamic this time around may tip the scales toward risk aversion. This bodes ill for sentiment-sensitive currencies like the Australian and New Zealand while boosting the US Dollar and the Japanese Yen.”

 

 

Quiet economic calendar thrusts “Fed Speak” into limelight

 

Ilya Spivak, Currency Analyst at DailyFX, comments:

 

“A quiet economic calendar in European and US trading hours puts the spotlight on the “Fed-speak” calendar, with comments from FOMC policymaker Richard Fisher in focus. The usually hawkish Dallas Fed President is likely to add his voice to the already single-minded chorus of central bank officials arguing in favor of continued “tapering” of QE asset purchases.

 

“Rhetoric supportive of stimulus reduction will follow the firm tone noted in minutes from January’s FOMC policy meeting published earlier this week and a six-month high on headline CPI inflation revealed yesterday. A draft communiqué from the weekend’s sit-down of G20 finance ministers and central bank leaders likewise supported backed the withdrawal of monetary stimulus.

 

“As we discussed in detail earlier in the week, news-flow supportive of QE cutback continuity stands to aid the nascent recovery in the US Dollar. The benchmark currency has now secured four consecutive sessions in positive territory and is now working on the fifth, which would amount to the longest back-to-back rally since late October 2013.”

 

 

Chinese and European manufacturing figures deflate optimism in global markets

 

 

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“Optimism in global markets took a dent overnight as both Chinese and European PMI manufacturing figures disappointed, underscoring the rising concerns of a more concerted global slowdown. Global growth concerns couldn’t be coming at a worse time, when the US economy has undergone a series of disappointing data across all major points as the Federal Reserve winds down its stimulus program.

 

“The taper of QE3, while contingent upon data, looks like it will proceed as planned barring a major market dislocation. The US Dollar has barely benefited however, with the EURUSD holding above $1.3700 and the USDJPY struggling at ¥102.00. We turn to stock indexes as a guide for risk in the void of market moving US economy data. A further breakdown by the S&P 500 will be threatened by a daily close under 1807, while bulls can reassert their February dominance only above 1832.”

 

 

 

Eyes turn to the Bank of England’s policy meeting

 

 

Ilya Spivak, Currency Analyst at DailyFX, comments:

 

“UK event risk headlines the docket in European hours today with minutes from this month’s Bank of England policy meeting and January’s Jobless Claims data on tap. Traders will look to the former release to help further illuminate the discussion about the evolution of the MPC’s forward-guidance regime. The latter report is expected to show applications for unemployment benefits fell 20k from the prior month.

 

“On balance, British Pound volatility borne of rhetorical nuances in the MPC’s discussion or pronounced deviation from consensus forecasts on the jobs data is unlikely to generate follow-through. The lion’s share of the current landscape was already established with last week’s Quarterly Inflation report, leaving relatively little room for near-term shakeup of the status quo.

 

“Later in the day, the spotlight turns to minutes from January’s FOMC sit-down. The report may mark the beginning of a recovery for the US Dollar, which has been heavily sold over recent weeks in a move that seemed to reflect the unwinding of EM-driven risk aversion. A relatively hawkish tone from Fed officials that reaffirms a commitment to “tapering” QE despite recently disappointing US economic news flow may offer the benchmark currency renewed vigour.”

 

 

The EUR/USD peaks as weight of deflation subsides

 

 

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“The EURUSD has streaked back to its late-January highs as the weight of deflation talk has subsided once more. Not surprisingly, the more aggressive dovish commentary in recent weeks has come from France, a country with a declining rate of export growth over the past three-plus years. French exports have fallen from +10.7% y/y in the 3Q’10 to +1.5% in the 4Q’13. A weaker Euro would absolutely help French exporters get a competitive edge. But it’s much easier for policymakers to blame a seemingly crooked exchange rate for the problems than the misguided policy created by their own hands; c’est la vie.

 

“There has to be good reason for the ECB to remain on hold all these months despite the continued downswing in inflationary pressures. Even as export growth in the region has been stunted, a stronger Euro might not be such a bad thing for the Euro-Zone at present time. With unemployment rates, especially among the youth, elevated to at or near all-time highs, inflation would more quickly erode purchasing power from a struggling consumer base. Just like higher taxes and reduced government spending (austerity) can provoke consumers to spend less (simple opportunity cost of what to do with diminishing available capital), more inflation in an environment characterised by a weak labor market and low wage growth could cripple consumption and drive the Euro-Zone back into recession.

 

“Last week, two developments along this front arose: updated inflation expectations from the ECB remain firm towards +1.7% to +2.0% over the medium-term; and the 4Q’13 GDP report was better than expected at +0.5% y/y versus +0.4% y/y expected. The 3Q’13 GDP figure was also revised higher to -0.3% y/y from -0.4% y/y. In support of the ‘a stronger Euro is helping’ argument, consider that on an equal-weighted basis versus the Australian Dollar, the British Pound, the Japanese Yen, and the US Dollar, the Euro gained +1.12% in the 3Q; growth accelerated in the 4Q when the Euro basket gained +4.01%.”

 

 

GBP/USD’s impressive run stalls as investors take profits

 

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“The GBPUSD’s impressive run may be hitting a near-term resting point as the conflux of several key levels offers a point of reference for longer-term buyers to take profit at as well as for short-term sellers to trade against. While the GBPUSD ran through $1.6800 briefly during a light trading session on Monday, price had fallen under 1.6748 by the second half of the European trading session. 1.6748 represents the 61.8% extension of bull flag that formed from the July low through the September-November consolidation as well as the April 2011 high.

 

“Given the fact that the retail forex crowd remains heavily short GBPUSD (from 8.32 traders short for every 1 long to 6.26 today), selloffs in the near-term are likely to be supported by traders covering out of the money positions at first sight of a rebound. A weak CPI reading for January due out tomorrow (-0.5% expected vs +0.4% prior m/m) could provide further ammunition for new shorts to work with.”

 

 

 

Dollar pain trade goes on

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“‘The year of the US Dollar’ might be an appropriate summary for the consensus estimate on the street for which currency would be the top performer in 2014. Backed by the Federal Reserve’s plans to wind down its QE3 stimulus program, a rising interest rate environment was supposed to be the backbone of greenback strength. Yet the first several weeks of 2014 have proved everything other than these platitudes to be correct.

 

“It’s impossible to ignore the coincidence of US Dollar weakness with the sudden slump in top of the line US economic data. The US Dollar pain trade really began on January 10, when the market was stunned with a +74K (later revised to +75K) December NFP print. The US Treasury 10-year Note yield, hovering near 2.98%, plummeted into the mid-2.80s and never looked back. The decline in yields coincided with a break of the uptrend off of the April and October 2013 lows, and the UST 10YY dropped to near 2.580% within the past three weeks.

 

“The US Dollar hasn’t had it any easier as the return of rising US yields from their recent lows hasn’t done much to help. One instrument in particular is warning of further US Dollar weakness: Gold. Indeed, our Speculative Sentiment Index update this week has issued caution given extreme positioning in several US Dollar pairs, signalling further pain may be ahead.”

GBP/USD rally may not be finished yet

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“Retail forex crowd positioning in GBPUSD may be the clearest example of emotions dictating trading decisions, rather than objective analysis, that we’ve noted to date. The GBPUSD recently broke the downtrend from the late-January highs, and retail traders, who were already short, chose to double down: they stepped up their shorts to their highest level since 2002.

 

“With the SSI ratio now at -8.15, there still is the threat of capitulation by shorts to prompt a short covering rally, driving the GBPUSD even higher. We retain our bullish bias as the 2014 high at $1.6670 looks increasingly vulnerable. Equity market weakness could help further support the Sterling versus the commodity currencies as well.”

ParFX adds Citi and JP Morgan as founding members

Citi and JP Morgan have joined ParFX as founding members, the trading venue said on Wednesday, taking the number of core members to 14 and bringing the company closer to introducing prime brokerage clients in the coming months. The less-than-a-year-old platform says the addition of Citi and JP Morgan represents a validation of the idea that foreign exchange trading is changing and the platform is gaining momentum.