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Foreign Exchange

Fun on the farm – or why FX is never predictable

As everyone now knows, there was a big EUR/GBP transaction done against the 1.15pm ECB fix on Wednesday. The deal was linked to the EU subsidy paid out to British farmers every year.

I first heard about the order over a week ago from a contact who had been listening to the Farming Today radio programme on BBC Radio 4 discussing how much better off UK farmers would be as a result of GBP weakness. In 2008, the EUR/GBP rate was fixed at 0.7903; in 2007 it was 0.6968.

Although the information was freely available, I was hoping that people in the market wouldn’t know about it. I was wrong. On Wednesday morning, Nomura sent out a note: “There is persistent talk of a large (€3.5 billion) lefthand-side fix in EUR/GBP linked to an EC subsidy to farmers.”

Given that EUR/GBP was almost two big figures off its highs at the time, it would seem that a lot of people had positioned themselves to receive some of the yardage from the order. It makes you almost feel sorry for the bank that had won the mandate to do the trade. I won’t compound its misery by naming it.

Almost inevitably – hindsight is a wonderful thing – rather than crapping out, EUR/GBP rallied. This may be for numerous reasons, including the fact that the market probably got itself short ahead of the order; that it was not for €3.5

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