Regulators make it up as they go along 14Nov14

Regulators make it up as they go along

Michael O’Neill

FX Consultant / IFXA Ltd



  • Commodity currencies in demand
  • Cable whacked by QIR
  • Banks fined for sloppy FX practices, not fixing

By Michael O’NeillIt is an unsettled Wednesday FX market. The commodity currency bloc is squeezing out gains against the US dollar while lacking in a specific driver for the moves. USDJPY, which was in demand yesterday, is out of favour today. Cable got whacked by a quarterly interest rate report deemed to be doveish. And, just in case you missed the show the first time, Russian troops and equipment have crossed back into Ukraine, according to a BBC report today.

When the US is away, the yen is in play

The US was closed yesterday for Veterans’ Day observances, which allowed the yen a turn in the spotlight. Speculation surrounding a delay in the proposed sales tax hike and a snap election in Japan sparked a USDJPY rally on Tuesday but, as is often the case, it was a “buy the rumour-sell the fact” type move. USDJPY has given back nearly all the previous day’s gains. The election call hasn’t occurred and the sales tax move is reportedly still dependent on the GDP report due on November 16.

No “fixing” proved but regulators fine banks anyway

Bonnie and Clyde were vilified and then killed in a hail of bullets by government authorities for robbing banks. That was the punishment in May 1934. Times sure have changed. Now it is government regulators doing the robbing. Instead of being vilified they are being praised to the rafters.

Photo: iStock

The regulators, fresh off a huge win in a London Interbank Offered Rate (LIBOR) investigation that netted them over $2.3 billion in fines, set their sights on the $5.7 trillion per day Foreign Exchange market. They decided that unscrupulous FX traders must be fixing the WM/Reuters fixing rate, a key benchmark rate used by portfolio managers worldwide to measure and compare portfolio valuations.

Unfortunately, they couldn’t find any evidence that bank FX traders could fix a price that, by all definitions of an FX price, wasn’t a price at all but merely an indication or, at best, an educated guess of where some amount of one currency was exchanged for another. The official investigators didn’t let that information deter them. Like the postman who delivered the mail “rain or shine” the regulators were going to find reason to levy a fine. And they did.

Global regulators, including the UK’s Financial Conduct Authority (FCA), Switzerland’s FINMA and the US Commodity Futures Trading Commission (CFTC) have fined five banks $3.4 billion dollars for “failing to control business practices in their G10 spot foreign exchange trading operations”.

The regulators took exception (and they should have) to some FX traders disclosing customer information and internal bank information to competitors, which is a violation of a client’s expectation of confidentiality. Yet, FX traders and sales people have been talking about FX flows, stops and orders since Jesus threw the money-changers out of the temple. In fact, phrases such as “Fund selling Eurodollar”, “Figure bid for size” or (my favourite) “Smart money leaving stops above high” pass for FX market insight at many banks. To the uninformed, that may sound like collusion but in the G10 FX world, the reality is that the information is just “noise” i.e. useless and not illegal.

The FCA agrees. On its website it writes: “Although there are no specific rules governing the unregulated spot FX market, the importance of managing risks associated with spot FX business through effective systems and controls is widely recognised in industry codes”. The point is that the size of the fine does not really fit the crime considering that it appears as if the banks are being penalised for violating non-existent rules.

USDX takes a breather

The USDX surged at the beginning of November but couldn’t get above 88.34, which is now a double top. It has gradually slid low and is resting on the steep intraday uptrend line at 88.44, which, if broken, would suggest further losses to 83.93, the former October double top. A move above 88.34 targets 88.90 and then 89.20.

Chart: USDX daily with support and resistance

Source: Saxo Bank

USDCAD outlook

USDCAD is on the soft side and is attempting to test support in the 1.1270-90 area due to both general US dollar weakness vs the G7 and gravity. USDCAD failed to extend gains above 1.1399 yesterday. Therefore, in keeping with the “what goes up must come down” theory, the downside was exposed. The Canadian finance minister, Joe Oliver, releases the government’s Fall Update today. He is expected to announce that the budget deficit will be eliminated by next year (in time for an election call?). That isn’t the news. The news will be the impact of lower oil prices on government finances and what the government’s outlook is. Negative headlines on the detrimental effects of weak oil prices on the Canadian economy will reinforce USDCAD support. On the other hand, a balanced budget and a rosy economic outlook may encourage further Canadian dollar gains.

USDCAD technical outlook

USDCAD is in an intraday downtrend while trading below 1.1360 with the break below 1.1305 suggesting further losses to 1.1260, which represents uptrend support from September. A move below 1.1260 would extend losses to 1.1180. A move back above 1.1320 would negate the downward pressure.

Chart: USDCAD 30-minute

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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