Friday June 12, 2015 - 10:57:10 GMT
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Currency Wars: He Said, She Said
There has been much discussion about currency wars, which I refer to as a race to the bottom of the forex food chain. The Reserve Bank of New Zealand, which has been a leader in talking its currency down, backed it up with a surprise rate cut on a Thursday. This saw the NZD plunge on the surprise announcement.
However, it was the major powers that grabbed the headlines this week in what turned out to be a he said, she said driven forex market. On a Monday, President Obama reportedly said a strong dollar was a problem. The dollar fell sharply on the headline and a subsequent denial was shrugged off.
On Friday, there was chatter that German Chancellor Merkel said that a too strong euro makes reforms in countries such as Spain and Ireland more difficult. The euro fell sharply on the headline that has yet to be confirmed.
I called this a he said, she said market because it has been driven by headline news that has not been confirmed. In the old days when interbank spot dealers ruled the forex land, they would step in when the market overreacted to news and provide bids or offers to when they thought the move was overdone. These were true market makers,
In current times, when spot dealers who could interpret the news have gone the way of the dinosaurs, it is algos that can drive the price action. While I am not privy to the algo world, it appears there are automated programs that are designed to react to keywords and trade accordingly. We call them news algos and they seem to react more to keywords than what they actually mean. This should make news wires more responsible for their reporting but they are in the business of creating headlines that attract attention. Add in the much discussed pockets of reduced liquidity in not only the forex but all markets and you can see how news headlines can have an immediate and exaggerated impact.
This is the current world of forex trading and you can see the influence of the news algos in this week's he said, she said market.
Jay Meisler is the founder of the Global Traders Association and co-founder of a Global-View.com, the home of the web's first forex forum.
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