By Michael O’Neill

“Say What?”  Whenever you hear those words echoing in an FX trading room, currency markets tend to go off the rails.  They have been heard a lot, lately.

When the FX market goes off the rails, it makes a bit of noise. The global FX market is the world’s largest and most liquid market.  The Bank for International Settlements.(BIS) reported in April 2016, that the average daily turnover was $5.1 trillion.  The US dollar, the world’s most dominant currency, is involved in 88% of all trades.  The Canadian dollar is a tad less dominate. It is the sixth most active currency with 5.1% of the daily volume.

To put it in perspective, the Canadian dollar share of the total daily turnover is $260.1 billion dollars. If USDCAD moves 1%, in a day, it translates into potential revenue for traders of $2.6 billion dollars. That’s why the world’s biggest banks spend tens of millions of dollars on salaries, benefits and bonuses for scores of traders, analysts and salespeople who work extremely hard extracting their “share of the wallet.”

FX traders tend to be an analytical bunch. Some pore through all economic reports, including, but not limited to, Fiscal policy, central bank policy meeting minutes, in-depth quarterly outlooks, and day to day economic statistics, searching for clues to the future direction of a currency or currencies.

Others study FX currency charts.  They stare at graphs of price movements in various increments, from seconds to weeks, with each time period a single bar, line, or candlestick shape. Practitioners of this art draw lines, arrows, waves, dots etc. trying to discern future price movements. They believe that all known variables are already reflected in a currencies price.

Another group of traders rely solely on mathematics. These self-described “nutters-with-calculators” use sophisticated statistic analytical tools to determine the probability of a currency’s price movement, in a given direction, over a given time span.

Many traders use a combination of the above to determine trade strategies.  Unfortunately, there are not any trading strategies that can predict the unpredictable.In 1775, Scottish poet Robert(Robbie) Burns wrote: “The best-laid schemes of mice and men, Go often askew.”

He had never heard of President Donald J. Trump or Twitter, yet the prescient Scotsman certainly understood the damage that the man and the app could inflict on unsuspecting traders.

Mr Trump’s Twitter tirades can be linked to dozens of wild, FX market moves.  He’s threatened nuclear war; trade wars and missile strikes and delivered on two of the three threats.

The President preempted the June 1, US employment report when he tweeted “looking forward to seeing the employment numbers at 8:30 this morning,” The traders who saw the tweet knew that it would be good.  (it was) On May 8, traders scurried to find risk aversion trades after the President tweeted that he would be announcing his decision on Iran sanctions the next day.  He had made no secret of his opposition to the treaty.  On April 11, he tweeted warnings about US military action in Syria and followed through with the threat.

A popular playground refrain used to be “sticks and stones can break my bones, but words can never hurt me.”  The Canadian dollar “put the lie” to that statement.  Last week, the President was advocating turning the North American Free Trade Agreement (Nafta) into bilateral deals with Canada and Mexico.On June 5, there were reports he would use the G-7 stage as his podium to announce the US was leaving Nafta. The Canadian dollar was thrashed on that news.

President Trump is not the only government official whose words roil FX markets. Central Bank leaders such as the ECB’s Mario Draghi, Bank of England’s Mark Carney, and Bank of Canada Governor Stephen Poloz have all had their turns in the spotlight.  To be fair, their job descriptions include providing markets with their outlooks for monetary policy.

The trouble occurs when their actions or deeds contradicts their forward guidance.  The trio have taken turns sticking it to traders this year.  BoE Governor Carney primed FX traders for a rate hike before the May 10 meeting.  GBPUSD dutifully rallied from 1.3700 on March 1 to 1.4370 on April 18.  Then he changed his mind, saying “there are other meetings,” or words to that effect.  Prices collapsed and hit 1.3202 by the end of May.

BoC Governor Stephen Poloz was a little subtler.  In April, FX traders were expecting rates to be left unchanged and a hawkish leaning statement.  They were half-right.  The statement was considered dovish, and it snuffed out a Canadian dollar rally.

ECB President Mario Draghi confounded traders.  He never contradicted other policy Committee members who were talking about the need to put an end to quantitative easing and doing so, from the beginning of the year.  EURUSD firmed on the speculation and threatened to break above 1.2500, until the April ECB meeting. Mr Draghi’s insistence on the need for “ultra-easy” monetary policy sent EURUSD crashing lower, and it still hasn’t recovered.

Traders have learned that President Trump’s tweets have a short shelf life in terms of FX volatility.  One of the reasons is that he is prone to reversing himself, or because others in his administration provide damage control. 

Central Bankers words tend to stick around.  They are not concerned about short-term fluctuations in FX markets or any asset class but focused on how the long-term impact of their policies will impact their mandates.

Traders must react to Trump tweets or Central Bank comments because as Noted British economist John Maynard Keynes once said: “The market can remain irrational longer than you can remain solvent.”

Say What?