Morning Commentary: While the Cats Away, the Mice Will Play

Foreign Exchange - Morning Commentary
While the Cats Away, the Mice Will Play
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Many key financial centers remain closed today, but if you are one of the few returning to work, it would appear that many asset class prices, specifically foreign exchange rates, are largely where we left them on Monday or Tuesday. With a lack of economic news or data this week and many participants on holiday, that would be a reasonable deduction.

However, that would be incorrect. Currency markets have been prone to extreme bouts of volatility amid thinned liquidity conditions in recent times when algorithmic trading can send shockwaves through the markets. While humans were largely away from their trading desks yesterday, the machines and algorithms took over creating a wild and wooly rollercoaster ride for the British pound and the Japanese yen.

According to the Bloomberg FX feed for yesterday, the British pound traded as high as $1.3253 and as low as $1.2360 before returning to its previous closing level near $1.2950. The same was almost true for the Japanese yen where the USD/JPY exchange rate spiked sharply lower from its previous close near 109.50/$ down to 106.50/$ before making another U-turn back to its previous close.

Technology is wonderful as it enhances and improves almost all aspects of work and daily living. But in almost all those cases, human control, guidance, and direction play an essential part in achieving the desired results and outcomes. When machines take over in illiquid market conditions, erratic swings can take place creating untradeable and chaotic market conditions. More human intervention and oversight needs to be done going forward to prevent these types of frenzied conditions from taking place.
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