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Foreign Exchange

Weekly review: Enter the Draghi; FX volumes stagnate

We have been waiting to write that headline about Mario Draghi since the end of July when the European Central Bank president pledged to do whatever it took to ensure the survival of the eurozone.

This week he finally made good on his pledge, announcing the central bank’s new OMT scheme, not just another ECB acronym but its new eurozone bond-buying programme. There still remain obstacles to its implementation. Eurozone governments must request the ECB bond-buying aid, and the Italian and Spanish governments did not appear at the end of the week to be ready to request assistance. The market also waits on the German constitutional court, which could challenge the change in the ECB’s remit.

Still, the move was well received, even if in truth it had already been well priced into the market, given the rally in EURUSD over the past six weeks.

Any “buy the rumour sell the fact” sell-off in EURUSD was well contained, however, not least because, as Citi pointed out, investors were already long from much lower levels and faced little danger of being stopped out.

Arguably the biggest reaction came in EURCHF, which showed signs of life for the first time in five months.

The scene was set for a move in the currency pair as rumours circulated on Wednesday that the Swiss National Bank might be preparing to raise the floor in EURCHF.

Confirmation of Draghi’s plan on Thursday, along with SNB FX reserve data on Friday, sparked a rally in EURCHF. Most were sceptical that the move would last, however, with the world’s largest custodian bank telling us that haven demand for the CHF was holding up.

FX volumes dry up in August

Meanwhile, figures emerged suggesting that the summer lull had been more pronounced than usual, with the world’s leading FX platforms reporting large falls in volume as currency volatility hit its lowest level since the eruption of the financial crisis.

Thomson Reuters and CME Group reported that volumes had fallen to 2009 levels, while at EBS it was even worse, with the lowest volumes reported since 2006.

That came just days after EBS announced a series of changes to the trading rules on its platform after a review by new chief executive Gil Mandelzis.

He believes the changes will address EBS client concerns about the ability of high-frequency trading systems to take advantage of decimalization in FX trading, as well as their ability to transact currencies at high speeds.

Doubtless, he will hope that the refinements to EBS’s brokerage mechanisms will result in a pick-up in volumes once they are implemented on September 17.

Elsewhere in the industry, Deutsche Bank said on Thursday that it had revamped the leadership structure within its FX business, appointing Kevin Rodgers as the new global head of its FX operations.

So all in all, quite a way to kick of the first full week after the summer break.

We still had time, however, for loftier endeavours and delved into the mystery of the carry trade.

According to Swiss Finance Institute professor Loriano Mancini, it works because of liquidity. And here we were thinking it was all about yield.

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