Greek Negotiations Set off Illiquidity Bomb
Today’s sudden jump in the Euro and large decline in the USD are not based on any factual news or developments. Ten year bund yields jumped 13bps to 0.66%, but the bulk of that move occurred before the FX rout. Rumors and headlines continue to fly about the status of Greece’s talks with it’s creditors. Needless to say it’s been an interesting open to the week. The Euro slid Sunday evening as there was no deal over the weekend, and spent Monday chopping around 1.0925. A high level meeting took place Monday evening between IMF Chief LaGarde, ECB President Draghi, German PM Angela Merkel, French PM Francois Hollande and Greek PM Alexis Tspiras. This meeting only yielded a pledge to continue working on the matter. On Tuesday as London walked in we learned that both the Troika and Greece were working on their own separate proposals to be submitted to each other to see if there could be an agreement before Friday’s 303mm Euro payment to the IMF is due.
Here is where things got fuzzy. The Euro traded firmly after Eurozone CPI was reported higher than expected at 0.3% vs 0.2%. Price rose from 1.0980 to 1.1040 on that news. Shortly after 8:30am, EURUSD suddenly and randomly launched higher over 150 pips in the space of about 15 minutes to a high of 1.1195. Just after this move, ominous headlines came out from Eurogroup head Jerome Dijssbloem saying that negotiations were not going well and deal was not likely possibly at all this week. Price fell back towards 1.1100 and bounced, now sitting at 1.1175. It’s as if the market just became frustrated with the constant threat of a squeeze on any type of deal headlines and just decided to ramp price before the deal was even done.
- DIJSSELBLOEM SAYS CREDITORS STILL FAR FROM A DEAL WITH GREECE
- DIJSSELBLOEM SAYS PROGRESS ON GREECE STILL SLOW, INSUFFICIENT
DIJSSELBLOEM SAYS CREDITORS WON’T MEET GREECE HALF WAY
- DIJSSELBLOEM SAYS GREEK GOVERNMENT MUST BE “HONEST WITH VOTERS” ABOUT FINANCES
Today’s moves are indicative of thin market, but also a market where the players involved have shifted significantly over the last year. Banks barely have human traders after the FX price fixing scandal, and don’t take prop positions as much as they used to due to regulatory risk and capital requirements. Trading algorithms dominate execution of trades, and most hedge funds use model strategies based on momentum. Given this market structure, once EURUSD rose above 1.1100 there were no sellers in sight as momentum driven hedge funds were instantly stopped out as price ran towards 1.1200 in a matter of seconds. Just as early as 2012 when I worked on the FX desk at Citi, it was common to see human FX traders taking short term discretionary bets. Dealers would be selling just ahead of big offers in the order book or buying just as a client is asking where they can buy a big chunk(that’s legal). These types of trades were very valuable to market liquidity because bank traders were the only source of large discretionary(as opposed to momentum models) flow. Traders could step in, sell 40 or 50 million Euros on a hunch and cover it 15 pips lower.
This type of trading is going extinct, leaving only a very small retail community and corporations as the only market participants that aren’t using models or algos. With nobody around to step in front of markets anymore that has enough money to stop these flash crashes, this type of thing will only become more common. I reduced my leverage significantly about 4 months ago as I noticed this trend developing and I would advise other retail traders to do the same.