For regular readers of my articles you will note that more often than not the subject matter is not specific to intraday trading but more specific to wider global macroeconomic events. However, such were the movements in the currency markets today that commentary was absolutely necessary for two reasons.
The first reason being that a 4% move in the FX markets for a major pair is very large (EUR/NZD), secondly the currency movements seen today are a rather worrying precursor for things to come in terms of global recovery. The banning of short selling sent the euro plummeting as the ban on naked short selling was viewed as another last chance attempt at controlling the markets and regain stability in the eurozone. The implementation of this ban clearly shows that the overbearing view is that the $1 trillion rescue package will not help the region in the long run. Furthermore if $1 trillion is not enough then quite clearly no amount of aid will be satisfactory.
On closer inspection the ban also highlights a number of cracks, first up the ban on credit default swaps. Credit default swaps are insurance policies much like any other insurance, they insure against the worst possible outcome of an event. In the finance world that event is default.
An investor will pay a fee each month to insure against a country defaulting and if said country does default then the investor receives a large payout. The issue here is that these CDS derivatives are traded over the counter and so they can very legally be traded in London or New York, a ban in Germany is not quite the forceful move EU finance ministers were hoping for.
The second problem this short selling ban has created is further downward pressure on the euro. If an investor is looking to bet on the fall of equities of a given region they can just as easily bet on the demise of the currency. As a result everyone who has been banned from shorting in German will simply move to shorting the euro.
To make matters worse hedge funds, who are notorious for holding aggressive short positions, are very much betting against the euro. Hedge funds and other large speculators on May 11 increased bets for a decline in the euro to 113,890 contracts more than those anticipating a gain, the most ever, according to Commodity Futures Trading Commission data. As we have seen before hedge funds have serious market moving abilities. As a result of all of this the euro went as low as $1.2144 fast approaching the $1.20 level dragging with it Sterling hitting a low of $1.4239. Trading then became very volatile as a rumour circulated that Greece was considering leaving the euro, this remained just a rumour but the markets gave the possibility some thought.
The currency markets then did an about turn as the euro shot up with no one initially sure the reasons behind such a move. The initial boost to the euro was driven by speculation that EU would support the euro in order to stem losses. Whilst this may have caused a rally in the euro I can’t help but draw comparisons to the U.K and the efforts made to support Sterling prior to black Wednesday when the Pound had to be withdrawn from the European Exchange Rate Mechanism.
Similarities can be made between the ERM and the euro in terms of what they set out to achieve and their subsequent failures. The most notable gain came from the euro and the New Zealand and Australian Dollar. Unfortunately the falls by these commodity lead currencies are signs that a global recovery may start to falter.
If global demand shrinks then prices fall for raw materials and as such countries such as Australia New Zealand and Canada lose huge sources of revenue, often with little other industries to fall back on. A final nail in the coffin for intraday trading was the possible slowdown of china, one of the biggest consumers of raw materials. What we can draw from today and recent events is that at the moment the grass is not greener anywhere. The fall in the euro suggested a deterioration of the single currency whereas today’s rallies are viewed as equally negative in simply being a marker of slowing output from other nations and the EU implementing hasty rules to gain control of the euro when everyone else has lost faith.
In a final point, the rally in the euro has to be viewed with caution. It is quite clear that those who were shorting the euro are trimming their positions, which is hugely different in going long on the euro. At the moment only the very brave are long on the euro for the foreseeable future.
Written by Adam Bibbing.
