Monday December 22, 2008 - 04:27:22 GMT
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FX Solutions - www.fxsol.com
The Silly Season
In journalism it is the month of August when all the newsmakers are on
vacation. The business movers are in the Hamptons, the political
shakers are back in their Congressional districts but the print pages
and websites still need to be filled with copy. So writers dig deep
into human interest, a dog hero here a quintuplet there, perhaps a fish
and cat love story. Stories that would never see the light of day in
another season are front and center above the fold.
Currency traders may not be keying on trivial stories masquerading as
financial news but they have their own silly season. It is the last
month of the year and particularly the last two weeks of December. The
volatility in this holiday month can be quite extraordinary, the ranges
well beyond the normal. If the markets are not quite exaggerating
unimportant news to market moving status they are certainly putting far
more energy into their interpretation.
From 2:00 pm on the 16th of this month until 3:00 am on the 18th the
euro rose more than 900 points against the dollar, from 1.3770 to
1.4718. By noon of the next day, the 19th, it was back at 1.3824. A
total move of more than 1800 points ending in almost exactly the same
Of the fifteen trading days in December there have been two 300 point
days, three 400 point days and two five hundred point days. Last week
the euro traded more than 400 points every day except Monday which saw
a mere 340 point range. On Tuesday and Thursday the united currency
moved more than 500 points.
What is going on here? Are the markets chock full of dramatic
developments? Is this foolishness? Perhaps, but only in the sense that
whatever direction the market takes in December is usually reversed in
There is of course a reason for all this volatilityâ€”liquidity--or
rather the almost complete lack thereof. The largest players in the
currency markets, the banks, close their books for December. Their
traders stop quoting outside the firmâ€™s own customer book. The same is
true for most major funds and proprietary trading firms. But financial
news does not halt for the holidays, especially this year. When news
does hit the market there is much less potential deal volume to absorb
whatever trading interest exists and fifty point moves turn into two
There is no clearer model of the mass participatory nature of trading
markets. Without the majority of players one or a few may drive rate
levels. And the resulting currency rate reflects those few inputs not
the decision of a market.
Because of the negligible liquidity and the absence of the majority of
the currency marketâ€™s major participants rate decisions reached in
December rarely stand. Witness the trading of history of the past five
In December 2007 the euro plummeted from a high of 1.4769 in the first
week to a low of 1.4309 in the third. In the following three weeks it
reversed up to 1.4921.
In December 2005 the euro fell from a high of 1.2058 in the first week
to 1.1777 in the last week of the month. But at the start of the New
Year it switched gears rising to 1.2181 and continued higher to 1.2322
by the last week in January.
Trading in December 2004 exhibited a similar pattern. From a low of
1.3139 early in the month the euro climbed to 1.3665 on the final day
of the year. But by the end of the first week in January it had sunk to
1.3025 and continued falling to 1.2731 by the second week of February.
In December 2003 the euro rose from 1.1937 in first week to 1.2910 on
the first trading day of the New Year. It then suffered a month long
drop to 1.2218.
Only December 2006 does not conform to this pattern. From a high of
1.3366 during the second week of the month it dropped to 1.3090 by the
final week. It then continued to fall in the New Year to a low of
1.2865 in the second week of January.
The reason for these reversals is simple. The market movement in
December represented only a small fraction of the market opinion. Most
institutions and traders are on hiatus. If few are playing then the
opinion expressed is, you might say, not representative of the whole.
When the mass of traders return in January they have, in four out of
the last five years, expressed an opinion different than the conclusion
of December. In four out of five years the move in December was
reversed in January when normal liquidity returned. Maybe the silly
season isnâ€™t quite as silly as it seems.
FX Solutions, LLC
Chief Market Analyst Joe@fxsol.com
IMPORTANT NOTICE: These comments are for information purposes only.
Past results are not necessarily indicative of future results. FX
Solutions, LLCÂ® believes that customers should be aware of the risks
associated with over-the-counter, spot Forex. Forex trading is highly
speculative in nature which can mean currency prices may become
extremely volatile. Forex trading is highly leveraged, since low margin
deposits normally are required, an extremely high degree of leverage is
obtainable in foreign exchange trading. A relatively small market
movement will have a proportionately larger impact on the funds you
have deposited. You may sustain a total loss of your funds. Since the
possibility of losing your entire cash balance does exist, speculation
in the Forex market should only be conducted with risk capital you can
afford to lose which will not dramatically impact your lifestyle.
To the best of our ability, FX Solutions believes the information
contained herein is accurate and true. We reserve the right to make
corrections and/or update the material when deemed necessary.
Therefore, FX Solutions assumes no responsibility for errors,
inaccuracies or omissions in these materials.
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