FX investigations – where next ?

News that FX traders may have shared information about order flow with large customers is not really news. However, there is a significant difference between sharing information about order flow BEFORE the deal takes place, and reporting it in generic non-specific terms, AFTER it has occurred.

The focus of the investigations is going to shift in 2015, as compliance teams and the various authorities realise that the actions of the FX traders with regard to fixing deals, are just the tip of the massive iceberg that is the foreign exchange market. There are still a number of unanswered questions :

Why do Fund Managers continue to allow their FX business to be done at “benchmark” prices that they KNOW are sub-optimal? When will pension fund holders start to question whether the Fund Managers have fulfilled their fiduciary duties concerning “best execution” ? How do major bank Salespeople differentiate themselves from their competitors in order to “win” business ?

Although we have seen a welcome pick-up in market volatility over the last few months, this might be a year of fears over what will be revealed by the next phase of investigations, and this may continue to cast a shadow over the FX market in 2015.

EUR/USD – Will it be different this time ?

The all-time low of EUR/USD was seen in Q4 2000 at 0.8230 and the all-time high was 1.6038 in Q3 2008. Since then, there have been 4 assaults on the 50% retracement level of 1.2134. The first time this happened, the move was rejected (approximately 8 years after the low), but the next three times (Q2 2010, Q3 2012 and most recently, this month) have seen 1.2134 breached, but we have never followed through towards the 61.8% retracement level of 1.1213.

Will it be any different this time ? IMF data would suggest that here does not appear to be much of an appetite to buy Euros at these lower levels, and with the prospect of Draghi introducing QE very soon, and Greece’s membership of the EU under threat, it would appear that short EUR positions will be held for the time being. Having said that, it pays to be careful, when it all looks too easy !