While FastMatch, Hotspot FX and Thomson Reuters saw trading volumes rise three-fold the day after the EU referendum, FX Transparency co-founder and CEO James McGeehan explains that many of his clients avoided trading on June 23.
“Many large asset-manager clients suggested the communication from the FX trading banks in the run-up to the referendum was inconsistent,” he says. “Some banks frequently warned of potential liquidity issues and e-commerce service impact, while other market makers were noticeably quiet on the subject.”
As with any notable geopolitical/economic event that has a direct impact on the FX markets, clients look for as much insight based on the dealer's expertise and experience as possible, says John Halligan, president of Global Trading Analytics (GTA).
“In environments such as this, what would ordinarily be a routine transaction takes on much greater significance,” he says.
Some of FX Transparency’s clients reported that month-end flows – which closely followed polling day on June 23 – saw higher spreads and more expensive trading.
And the head of FX trading at a leading international bank agrees that liquidity remains challenging post-Brexit amid concerns that the effects of the EU referendum vote are yet to be fully felt, adding: “Clients are more willing to work with dealers – there is more of a conversation going on, which is a positive development.
“We have seen a number clients change their style into what you might term a more bank-friendly approach, working with their dealers to get their trades done.”
The head of FX trading says no obvious themes have emerged, which combined with the US Independence Day holiday earlier this week has kept volumes down.
“Clients don’t appear to know what to think," he says. "There was a story about German government bonds the other day that caused considerable movement in the Bund and illustrated how sensitive the markets are to any new information.”
A Bloomberg story suggested that the European Central Bank was considering loosening the rules for its bond purchases to ensure enough debt is available to buy in the aftermath of the Brexit vote.
With some clients expressing the view that the UK might not go through with the process of leaving the EU, he suggests there must be some premium in cable rates for going back on Brexit.
“For these reasons we are almost back to where we were before the vote, but with wider spreads and less liquidity," says the head of FX trading. "I don’t expect clients to be overly active until the nature of the UK’s new relationship with the EU becomes clearer, so it is set to be a quiet summer.”
He says if the UK economy recovers from the Brexit shock relatively quickly, clients would start to view the single currency in a different light, explaining: “They are aware that the euro could unravel if there is further trouble in countries such as Portugal or Greece.”
|John Halligan, GTA|
One former FX analyst says clients are bracing themselves for a prolonged period of uncertainty as the subsequent discussions and unravelling of the treaty create ‘events’ during the next two years, adding: “They will also be watching interest movements extremely closely as currency plays revolve around interest-rate expectations and uncertainty.”
While describing the immediate fallout from Brexit as “small beer” compared with previous market shocks, he says some traders perversely would welcome the demise of the euro.
“This would mean more currency pairs to trade, increasing profits for many chief dealers who still remember how to cross the mark against the franc and the lira and the drachma and the peseta," says the former FX analyst. "They will be licking their respective chops at this opportunity.”
When asked if the fall-out from the referendum has been seen by clients as just another market event or whether they expect Brexit to lead to a prolonged period of uncertainty for sterling, GTA's Halligan acknowledges that while some clients might want to remain optimistic that concerns about Brexit are exaggerated, everyone to some degree is concerned about the long-term impact of Brexit on the stability of GBP and EUR.