Aim! Fire! Why media focus on FX price rigging misses the target

FX Price Rigging-The Fix Ain’t in

Bloomberg posted a story last night ( Currency Spikes at 4pm in London Provide Rigging Clues) alluding to price fixing by foreign exchange traders around the month end 4 pm London close ( in Canada, it is known as the 11:00 am fix) implying that the pattern is similar to the Libor price fixing scandal.  I call “Bogus”!

I have been an active participant from both the sales and execution sides of these transactions while working for leading global banks and I can say from experience that this story is merely an attempt to create a controversy where none exists.

The month end London close (for book keeping purposes, determined to be 4 pm) is when the WM/Reuters rates for 160 currencies are published.  According to the Bloomberg story, the methodology is that the prices for the 21 most active currencies are derived from an average of all transactions for one minute, beginning 30 seconds before the hour.

The reason that this is important is that many fund managers all over the world use these rates to “close their books”  at month, quarter and year end.  Portfolio’s are rebalanced as FX price fluctuations during the period can result in a portfolio manager being under or overweight a currency, necessitating an FX trade to bring the portfolio bank into line with their internal parameters.

What makes it interesting is that there are literally thousands of portfolio managers in this position resulting in some very large, market moving rebalancing trades.  The Bloomberg story begins with what they insinuate is an example of a currency manipulation trade in the Canadian dollar, on the last Friday in June.

I am pretty sure that they are wrong based on over 20 years of executing the fix transactions and working directly with some of the biggest portfolio managers in the business.  The trading around the “fix” is less an example of price fixing but more of an example of profit preservation in what is a pure supply and demand environment.  The following is a simplistic example of a typical fixing trade using USDCAD.

For the rest of the article please go to Saxo Banks’s Trading Floor



The loonie appears to be heading south and not just because of the frosty temperatures across the land. In fact, a decisive break above the 1.0230-50 zone would terminate the  long term USD/CAD downtrend channel, intact since September 2009. exposing 1.1220 which is the 50% fibo retracement of the 2009-20013 range of 0.9370-1.1.3040.

Far-fetched=perhaps, but there are a number of factors/events etc that suggests that the loonie has seen its best days for the foreseeable future.

1) There is a school of thought that suggests that global investors are shifting away from the long term safe haven/yield play following the financial meltdown with the improving outlook for Europe and the USA, leading to an unwinding of long CAD$ positions.

2)The latest FOMC minutes suggest that the QE program will end sooner rather than later which will lead toUS dollar demand, undermining the loonie.

3) The sluggish Canadian economy has crushed any hopes of a near term rate hike in Canada. Canadian Budget and trade surpluses have turned negative, eliminating two previously bullish CAD$ factors.

4)The Canadian dollar doesn’t appear to be deriving any more benefit from oil prices in the $85-105 range and the drop in gold prices appears to be another negative CAD$ factor.

However, resistance in the 1.0230-50 zone should be significant and a failure to break through will likely result in a prolonged period of 0.9980-1.0250 consolidation.

LoonieViews July 25, 2012

July 25, 2012
USD/CAD Open 1.0185-90 Overnight Range 1.0175-1.0230The Canadian dollar stayed soft in Asia and rallied in Europe in line with the trading patterns of the other G-7 currencies. The Asian session continued the negative bias from yesterday however the Euro zone session was the exact opposite. The combination of thin markets and dubious Euro zone headlines led to a round of profit taking as the US dollar was sold. An ECB policy member opined about converting the ESM (European Stability Mechanism) into a bank, leading to traders buying EUR on the perception of the possibility of increased firepower to support troubled sovereigns. ECB President Draghi reportedly said that such a move was illegal on May 24. Meanwhile, European equity indices rose and NY equity futures are in the green. WTI oil is $88.56 and gold is $1,590.53. There isn’t any data of note from Canada or the USA.

The short term USD/CAD technicals are mixed. The medium term USD/CAD trend is bearish as evidenced by the downtrend channel (channel parameters are 1.0020 and 1.0240) on the daily chart below. For today, USD support is at 1.0170 and 1.0140. Resistance is at 1.0200, and 1.0220.

The Canadian dollar will continue to be supported by expectations of demand from the CNOOC/Nexxen deal. If you have any doubt about the possible impact of a conversion of this magnitude, look back to Oct.-Nov.07 and review the result of the ALCOA/Alcan deal. History does repeat itself.

And in other news, Premier McGuinty denied additional funds for Toronto to combat guns and gangs because he spent the money to buy votes in troubled Liberal ridings.

Today’s Range 1.0160-1.0210

Michael O’NeillLoonieViews