Forecast 9/26/22 - Are FX Markets Breaking?
Bank of Japan can't stop hitting itself in the face
Welcome anon to another week of paid content.
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Song of the Week - Pink - Don’t Let me Get me
An anthem for the Bank of Japan and everyone who secretly hates themselves.
Table of Contents
An Ahistoric FX Market
Economic Calendar
Central Bank Speeches
BoJ
Japanese Government FX Interventions
ECB
Federal Reserve
BoJ Meeting Minutes
GDP (lol)
US
UK
Crypto Macro
Price Action
Celsius Update
SEC Targets ETH
Conclusion
1. An Ahistoric FX Market
When I was wrapping up last weeks review post I realized I had left something rather large out of the post (lol, it was already >5,000 words). I presume that the vast majority of you are mostly unfamiliar with the FX (forex - foreign exchange) markets, I have been FX trading on and off for the last 8+ years, and things haven’t been this unstable since the early 2010’s when the ECB was still trying to figure out if it could save the Greek and Italian bond markets or not.
The second half of the 2010’s was a fairly normalized market, and outside of major splash fx disruptions (Trump election, Brexit, Le Pen almost winning French election, Switzerland unpegging the Frank, etc.), it was incredibly rare for any currency pair to move very much in a week. The FX markets are deep in liquidity, these are essentially the most liquid markets in the world. I did not arrive at my choices of which central banks to monitor on accident, these currencies represented the largest trading volume in the 2010’s. And there is a reason that the Federal Reserve is the key bank for us to watch as the US Dollar has been the dominant force in the FX markets.
In 2020, the global forex market’s estimated liquidity was $24 quadrillion. For reference, a quadrillion is the next -illion up past a trillion.
$24,000,000,000,000,000.
That’s 15 zero’s. A market with this much liquidity is incredibly difficult to move or manipulate. The primary weakness of the forex market is that it is traded 24 hours a day for about 5.5 days a week. It opens with the Wellington trading desk in New Zealand on Monday morning (around 4pm CST Sunday), and closes with the New York trading desk on Friday evening (around 4pm CST Friday). There are 18 major FX trading desks around the world, and they all have varying amounts of liquidity.
So even though there is $24 quadrillion of liquidity in these markets, that entire amount of liquidity is not available at any given time. The deepest points of liquidity occur when there is overlap at the point when the US and European markets are both open (~8am CST-11am CST) and when the Asian and European markets are both open (~1am-4am CST). And the weakest times for liquidity is typically Asian monday (Sunday 4pm CST-1am), and the brief period each day from 3pm CST-6pm CST when only the New Zealand desk and some overnight desks from the US and South America are open.
But even during these times of relatively shallow liquidity it’s still a very deep market and for entities to manipulate price in any appreciable manner it takes a massive amount of money. I’m going to give you a real world example so you can understand just how much money it takes to move a currency pair an imperceptible amount so you can understand the gravity of what occurred last week and has been occurring all year.
This example is over a decade old, HSBC got caught manipulating markets by informing their own trading desk of how much and when other entities were trading on the markets and pre-trading trades they were being paid to execute. So, pretend someone else is paying you to buy bitcoin for them. You buy bitcoin for yourself right before, and then buy their bitcoin for them and sell your bitcoin back into the market right after. Your client gets a worse price, and you pocket the difference.
This type of manipulation is fairly common and endemic across trading desks of FX, ComEx (Commodities Exchange), and likely the crypto trading desks at big institutions. People who believe that the banks are suppressing whatever asset they are trading will usually pull one of these cases out as proof without ever looking at the actual case details to see how much money was spent and how little the market was actually moved. The examples from this HSBC case are below.
The traders involved disclosed and received confidential information to and from traders at other firms regarding the size and direction of their firms’ net orders at a forthcoming fix. The disclosures provided these traders with more information than they would otherwise have had about other firms’ client order flows and thus the likely direction of the fix.
Now, are you ready to see how much currency manipulation you can get with ~$112 million (exchange rate at the time)?
In the period from 3:32pm to 4:01pm, HSBC sold GBP381 million on Reuters and other trading platforms. Approximately GBP70 million (or 18%) of this volume was sold by HSBC in advance of the 60 second fix window around 4pm. During the period from 3:32pm to the start of the fix window, the GBP/USD rate fell from 1.6044 to 1.6009.
That’s right. ~$112 million into the market moved the GBP/USD pair by 35 pips. A pip is 1/100th of a cent. (The exchange rate at this time was equivalent to 70 million British pounds = 100 million US dollars)
$112 million dollars on the FX markets gets you 35/100th of 1 cent in exchange rate movement.
This example is from sometime between 2007-2013. That was a volatile time for currencies, and markets were a lot easier to manipulate back then, than they are today. But you can expect roughly the same level of elasticity in the markets. It takes a lot of liquidity to move these markets, especially US dollar pairs.
The second half of 2010, a lot of things calmed down as most major players in the FX world believed that Europe, the US, and Japan had mostly gotten the instability from the 2007 crash out of their markets. In an average week, you could expect a currency pair to move 50-100 pips. In a month, maybe 200 pips. It was mostly a sideways market.
What we have today is not normal. It’s so far from normal that it should be alarming, but I sometimes forget to explain everything I’m thinking as I’m often just academically noting currency movements.
Last week, the Japanese government’s intervention into the Dollar/Yen FX markets moved the markets by 500 pips in an hour. Since they started their infinite Yen printer, the Yen has lost 4,000 pips since March.
Last week on Friday alone British pound fell by 400 pips. Since March, the British pound is down by almost 3,000 pips against the US dollar.
The Euro is significantly below parity as I warned anyone thinking to catch that falling knife back in July. Compared to these other currencies it’s fallen less, but it is far less stable than the British Pound due to the basketcase sovereign debt that the Euro is trying to hold up.
These are earth-shattering moves. Truly. I often am unsure of just how much urgency to place in my tone regarding my commentary on the events ongoing. It is often hard to really grab hold of just how important this is and how to transfer the proper gravity to you. Is the western financial sphere collapsing? No. But this can’t really continue for much longer without things severely breaking down. We don’t know how much Japan intervened in the FX markets last week, and won’t know for quite a while, but it was most definitely a 12 digit number to cause a move of 500 pips (5 cents) on the exchange rate.
We are seeing seismic shifts in FX holdings at many major institutions as a result of these events, and this most definitely includes central banks as well. In a normal year (overnight lending rates roughly equal to government inflation figures), I would have barely anything to tell you about these markets as their impact on crypto would be minimal or non-existent. At best, I might be talking about the Turkish central banks on-going destruction of the Lira, or we might be taking a closer look at emerging market exchange rates. Hell, I had planned to talk about the Partial Mobilization of Russian forces into Ukraine and Putin’s use of referendums in several Ukrainian provinces to justify mobilization in defense of what is now “officially” Russian territory.
But even that and low (but non-zero) chance of nuclear engagement really doesn’t hold a candle to how severe and significant the distortions are getting in the FX markets.
The larger thesis has been that the US treasury, and individual European treasury markets would break or require additional intervention; but if this trend continues, it may be that western allies will require intervention in the FX markets first before the US treasury ever does. And that intervention, depending on who does it and how could severely destabilize US markets prematurely. I go into much more detail in Section 3 under the Section about Japan. I’m fairly certain I figured out what Japan did in the FX markets this past week, and I have yet to see any other financial outlet pick up on this yet.
But as I said last week, I don’t know when or what the breaking point is going to be, but I’ll know it when I see it.
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