Be Careful of the 'Chief Strategists'

I�ve just read an article written by Kathy Lien entitled �Why is there such divergent price action in the dollar?� where I think she is trying to explain why the majors would move in different directions against usd. Quite frankly she is ever so confidently making no sense what so ever. My favourite quote is

�[I][B]If you look very closely, you will actually see that it is buying of the yen crosses that is leading USD/JPY higher�[/B][/I]

mmmm interesting conclusion Kathy. So you are telling us that as usd rallies against the yen but falls against the eur and the eurjpy cross has moved upwards? Oh and I was thinking it might be possible to arb the 3 pairs with no one realising.
I also remember seeing a TV interview once also where she quite arrogantly put a move in the usd down to some factors which I felt left some explaining.
My point in writing this is there are some Experts or �Chief Strategists� out here and they will tell you they have all the answers but you have to question them and if they really do know more than you!!!

Respect to the FX Men they quite clearly play the balance of probabilities, admit when they are wrong and never show arrogance!!!

Let them have it!

What he said!

I’m not sure what the gripe is here. She’s not making a forecasts, just pointing out what’s happening.

What she was saying in that quote is the primary trading volume is in the crosses. As hard as it may be to believe, not every forex trade involves the USD. When the buyers start piling in to EUR/JPY, for example, they increase the value of the EUR, decrease JPY, or both. Depending on how other things are playing out, that could either push EUR/USD up, push USD/JPY up, or some combination of the two. It’s the last of those scenarios which can create an increase in the USD against the JPY in conjuction with a fall in the USD vs the EUR.

I certainly have no problem questioning someone’s ability to call the market, but at least challenge them on that basis, not on a simple statement of order flows.

So you�re saying that because there are more buyers in eurjpy that will drive change the value of those currencies against the usd. Plausible logic but how could you ever come to such a conclusion? How would anyone know there are more buyers of eurjpy? The best indication would be the price but that wouldn�t be able to distinguish the price movement came from the majors or the crosses? And as you�ve sort of hinted not every trade involves usd so we could look at the volume of the pairs�� Well the majors predominantly trade on EBS and the crosses on Reuters and to my knowledge they don�t report volumes but even if they did FX is an OTC market so there are countless other platforms we would be missing out on. And I�m willing to break my trading rules here and put down my whole capital as wager that the volume of eurjpy will never on a daily volume will never exceed that of usdjpy eurusd combined.
I�m not saying looking at the crosses is useless but making that comment is!!! She also went to talk about other crosses against the jpy and although eurjpy does tend to trade in its own right if I rang an interbank and traded AUDJPY (not too exotic cross) it would always be done with the audusd and usdjpy traders�… why do you think the spread is so wide � it�s not simply that it is illiquid!

I sit not 20 feet away from a guy who spends his day talking with forex dealers - the folks who actually do the real volume trading, not the stuff we puny little retail accounts do. If he tells me that buying in EUR/JPY is driving the market then I’ll believe him because he’s getting it from the source. I wouldn’t be at all surprised if Kathy’s comments were based on the same sort of “flows” information.

Her comment is not a useless one. We all know (or should) that sometimes the USD drives the market and no matter what may be happening in other currencies, the factors influencing the USD will dominate. At other times that isn’t the case. Knowing which type of market we’re in can make a big difference in understanding current market conditions and trading them effectively. Kathy’s comment points out the fact that right now we are not in a USD drive environment.

Your friend must talk to an awful lot of dealers to have a good idea that eurjpy is seeing more action than the majors in 2 trillion market…
I agree talking about flow can be useful and welcome anyone saying that they are seeing a lot of eur buying or there are a lot of eur longs out there and I�ve never suggested that it�s all about the dollar but I still struggle with that comment. I�ll take on board what she is perhaps trying to say that we�re not in a usd driven market but if that is the case it is a very convoluted way of doing so!!

We obviously don�t share the same opinion but I also work in this so called �source� you speak so mystically about and I also don�t make my living by telling people I have all the answers.
And a question to you then: On a daily volume you actually think it is possible for eurjpy volume to exceed that of usdjpy and eurusd?

If there’s something mystical about how I use the term “source”, then that comes from someone else’s interpretation, not mine. The source is the inter-bank market where the real volume trades and prices are really set. Nothing too mystical about that.

As for her manner of market commentary being “convoluted” then I hope you’re prepared to say the same about a lot more people. I’ve heard similar sorts of phraseology from extremely reputable and well aware market commentators for as long as I’ve been in the market (mid-90s), and I’m sure it goes back further than that.

As to my colleague, he doesn’t really have to talk to that many dealers to get a feel for what’s happening. They all chatter with each other on a running basis every day as part of their job.

My bigger point, though, is who cares about absolute volume if it doesn’t lead to price movement? Volume can come from a bunch of difference sources with reasons that have little impact on prices. There could be a trillion USD traded in USD/JPY on a given day, but if it’s two-sided (meaning motivated equally by buyers and sellers) and prices don’t move, then what difference does it make? If EUR/JPY, on the other hand, does a fraction of that volume but it comes from the so-called “smart money” and drives the cross repeatedly to new highs, then it’s significant.

So �smart money� is that the sort of money that is [I]beta[/I] than the rest of us??? Excuse the pun!!!

OK so you�re saying it has nothing to do with volume and it is merely an observation of what this �smart money� is doing? First I don�t really like the term �smart money� - I can hope we can agree that a hedge fund or a prop desk in a bank could be described as �smart money�? These guys being smart with their money don�t tend to tell anyone what they are doing and some positively hide what they are doing!!!

So a sales/trader is working the London session and during his day he see some big size trades come through from my hedge fund clients buying eurjpy but bizarrely nothing in usdjpy and eurusd. At the end of the day he sees that eurusd, usdjpy and eurjpy are all up and attributes these moves to buying of eurjpy rather than anything in the majors.

Here are a couple of examples out of millions of possible why he would be wrong to be so confident:

A simple one: A large eurjpy buy order comes in to bank X from hedge fund Y. This is actually the HF closing out a position which he took on earlier in the day with another bank and for one reason or another has decided to get out of .Both banks have hedged/worked the order in the interbank market so simply across the day neither of these orders could have arguably had any impact of eurjpy.

A more complex one: Another big order comes into bank X from hedge fund ABC. Here the HF had a large exotic option in eurjpy but our man doesn’t know this!!! � I think it�s best for the example that we say something like and RKO as it�s simple but the delta can still switch violently. The HF has been hedging this option when it knocks out it has therefore become a big buyer of eurjpy. At the same time to this Bank Z which is on the other side of the option has also been hedging and is now a big seller of eurjpy. Bank Z hedges in the interbank as bank X is laying off the trade in the interbank. Both being equal and opposite that HF order won�t have effected eurjpy!

Both these orders would have created nothing more than noise for eurjpy and would have not have had any effect on eurjpy daily performance!!!

If you were around during the 90�s do you remember Andrew Kriegers position in the kiwi? I can�t remember the ins and outs but everyone saw his flow in the spot market and thought he was one way but it turned out he also had a large option position. They tried to trade against him and it all ended in tears!!!

Anyway back the original point eurjpy moves up. You can say that there have been more buyers of eur than there have been jpy. To say that these buyers of eur have been selling jpy and it is this which has moved eurusd and usdjpy is a step too far, in my opinion.

One exception I would add about my ideas would be the central banks as their flow is large and one way but it is certainly not �smart money� and also certainly not what Kathy is referring too!!!

Firstly, yes, I use the term “smart money” to refer to the institutions. Believe me, I make no statement regarding their actual intelligence which is why I dubbed it “so called” and put it in quotes.

Secondly, your examples are insufficient. One trade, no matter the size, is enough to create sustained price movement. A massive trade could cause a quick pop in prices, especially in a thin market, but once that trade is filled then prices will stablize. It takes sustained volume to move the market, or at least the market view that more volume is coming behind the initial trade.

I still don’t understand why you refuse to accept that not all trading goes through the majors, and that the major crosses play a big part in the game. You once used the fact that the AUD/JPY spread is wider than for either USD/JPY and AUD/USD to argue (I think) that the execution of that cross had to be done through the majors as a two legged thing. I’m looking at EUR/GBP and EUR/CHF with 1 pip spreads on my broker screen right now. Those are lower than EUR/USD, GBP/USD, and USD/CHF. That would seem to contradict your earlier argument.

And by the way, these days the bigger funds can do trades at least as large at the central banks. The reason the cbs still move the markets with their action has more to do with psychology than volume. They are sending a message, not actually trying to bully the market with flow, which wouldn’t work anyway, as they found out in the past.

Argument has never been that the crosses couldn�t move the majors it�s that anyone would be able to tell us that a particular move has come from buying in the crosses. In my experience the FX is a very simple product ion a very complex market. There are so many players in this market with different objectives. There is no central exchange. And the volume is just immense�� I remember first watching trading on EBS and being transfixed by the names flashing across the bid offer.

I only mentioned audjpy cross as Kathy used it too and when I did mention it I also conceded that eurjpy does tend trade in its own right as do eurgbp and eurchf as those four currencies are all major reserves.

I would agree that the central banks have a big psychological effect but they also control huge reserves these days. China and Japan together have almost 2.5trillion usd and that�s massive even in FX. And when you say central banks haven�t been able to control fx rates you�re probably thinking about the BoE or Italy in the early 90�s but in 2003/4 Japan quite successfully kept its currency low. The ability to buy your currency is limited by your reserves (BoE gave up half way through) but to sell your currency or devalue your currency is not really limited.

Anyway I don�t think we�ll ever agree on the above and it is a matter of conjecture on which I hope you agree we both have educated opinions. I think we�ve deviated quite a bit from her original article and my view of what she was saying.
This is a forum and disagreements are healthy. I still stand by my view that people starting out in this game should be careful how they read stuff. I�ll admit that I�ve read some articles by Kathy where I have learnt something but this one I felt was smoke and mirrors!!!

Actually, I was thinking about the BoJ, but they were just one of many that tried to sway the markets with limited to no luck at times. It used to be that they attempted to bully the market through sheer volume. I think they figured out back in the 90s that they couldn’t do that any more. If the market was determined, they couldn’t stop it.

Remember when USD/JPY made it’s all time low? The BoJ tried to intervene early on, but it wasn’t until the market really got clearly ahead of itself and overextended that they finally got it turned around.

After that it seems like the central bankers got better at picking their spots and not trying to take the market on head-to-head.