Weekly review: Boy, you’ve got to position yourself to carry that FX weight

By:
Russell J. Dinnage
Published on:

This week we have found the FX market slipping comfortably into the third quarter with a range of news and analysis on old faithfuls such as the carry trade, the AUD, CHF and RMB, and some signs of volumes returning to the market.

Top of the news was the launch of HSBC’s first algorithmic FX index designed to quench investor thirst for the trade of trades: the carry trade.

The Global Carry Index offers investment opportunities in a universe of 32 liquid currencies.

HSBC says the index distinguishes itself from other FX carry indices that have been around for years by giving investors the chance to learn from the carry mistakes of other institutions.

Speaking of the carry trade, HSBC took timein a recent report to reminisce about what it claims are the bygone days of when the carry was king.

It was a time before near-zero interest rates; it was an era when the market had a "clear framework for understanding and trading currencies", says HSBC.

Now, in a market dominated by risk-on/risk-off, the FX space is left reacting to the more ambiguous implications of quantitative easing, says HSBC in its recent report.

But wait! Commerzbank’s head of FX quantitative solutions group Jessica James argues the market shouldn’t be too hasty in writing off the carry trade just yet. Instead, James’ quant group at the German bank found, through a study of 45 G10 currency combinations, that recent G10 currency performance has been broadly similar to typical historical performances seen in the 1990s and through to 2002.

'You call that an interest rate cut?’

News from the Reserve Bank of Australia on October 2 of a 25-basis-point cut in the country’s benchmark interest rate took the market by surprise.

And while Commerzbank head of FICC technical analysis research Karen Jones was forecasting the end of irrational AUD exuberance by Q1 2013 – with her technical signals pointing to AUDUSD being set to hit $0.9750 early next year – ANZ reminded the market that, since the collapse of Lehman Brothers in 2008, AUDUSD has rallied by 35 big figures in trading in London and New York time zones while falling 30 big figures in Asia.

That means the surge in AUDUSD from $0.6 to parity and beyond has been fuelled offshore, says ANZ.

The RMB was also in the news, defying most forecasts and hitting its strongest level in 19 years.

Some put the move down to Chinese interference in the US electoral process, but equally intriguingly, some saw it as a sign that the clouds over global economic prospects are lifting.

Meanwhile, FTSE Cürex – the recently launched joint venture of the UK-based global index provider and an FX technology firm – said there are better returns to be had in RMB trading through enhancements to liquidity in the market for the Chinese currency.

The companies launched a new set of daily benchmarks that FX investors can access in offshore RMB.

However, in Europe, the Swiss National Bank’s (SNB) SFr1.20 floor still isn’t going away any time soon.

Despite a SFr8.5 billion increase in the SNB’s holdings of foreign currency reserves seen earlier this month, several FX strategists said a EURCHF level strongly above SFr1.20 in October means the central bank is more determined than ever to maintain the Swiss franc’s artificial floor long term.

Pump up the volumes

EBS, Thomson Reuters, CME Group and FXall all reported stronger September volumes, ending the August lull.

EuromoneyFXNews revealed that the former head of Société Générale’s FX trading operations Richard Bailey has joined Infinium Capital Management’s FX options shop in London in an effort to turn the trading house into currency options market-maker long term.

That’s not to say that single-dealer FX platforms (SDPs) are going away any time soon, according to a report by Oliver Wyman Group consultancy Celent.

The firm found that FX banks are pumping more money than ever into their SDPs in a fight for client business, even as incoming financial regulations in the US mean multi-dealer platforms such as FXall, FX Connect and Bloomberg can eventually become registered as swap execution facilities.