So that was from Monday and in that post we highlighted some cautionary commentary from Bloomberg contributor Cameron Crise who warned that if history is any guide, gaps tend to close – and in fairly short order.
That of course came on the heels of predictably erratic Australasia FX trading following the “market-friendly” outcome of the first round of the French elections. And while the direction of the moves did in fact make some measure of sense, it’s certainly worth noting that, as former FX trader Richard Breslow writes on Tuesday, gaps “followed by flat-lined price action suggest order books emptied.” Or, in other words, once everyone expressed their opinion on the Macron/Le Pen outcome, no one had much else to offer in terms of where we go next.
Read below for Breslow’s latest.
The problem I have with the reaction to the first round of the French presidential vote isn’t from the immediate movements of the euro nor European peripheral spreads to Germany. They were meaningful, reflected an admixture of relief and illiquidity and broke no new ground. What I do question is why everyone keeps telling me this was their forecasted and most likely outcome, yet the world has changed.
- Of course, if that is true, then people offering advice should be a lot more humble and include many more caveats with their conviction-view prognoses. But is it really likely that the calculus has changed from Sunday to warrant EUR/USD now beginning an ascent to a level only seen at the height of the initial panic on the night of the U.S. election? And we know what ensued after that
- What we’ve had so far this week, I know it’s only Tuesday, has been a repricing without the benefit of meaningful price discovery along the way. Gaps during the Asia-Pacific opening are one thing. Ones followed by flat-lined price action suggest order books emptied followed by “So what do we do now?” And if there isn’t a quick follow-through in momentum, the next question will be “What have we done?”
- Markets have proven they do a poor job of assessing political risk. Partially because it’s hard, the implications of outcomes often utterly unpredictable and, the dirty secret traders hate to admit, they sometimes prefer outcomes for others that, as citizens of that jurisdiction, they wouldn’t choose. Having said that, the “worst case” scenario that was avoided was never very likely
- And remember, when judging the global market reaction, there were about 12 hours from the election results before you could trade the assets most directly affected. That’s a lot of proxy hedging. Worth 30 big figures in USD/MXN?
- The good news is so many assets stopped at or near important technical levels, which makes risk-reward really good for trading, no matter your view. Take what you can get