The ‘Only Game In Town’: If FX Didn’t Exist, We’d Have To Invent It In 2017

Way back in January, we suggested that if you aren’t an FX trader, you’d better become one really fast.

It’s been abundantly clear for quite some time that regardless of whether central banks can engineer a generally benign environment that we and others have variously described as a carry trader’s/vol. seller’s paradise, day-to-day action is going to become almost completely beholden to geopolitics.

Epochal shifts in the political landscape (think Brexit and Trump) and near misses (think Marine Le Pen), may be hamstrung by the central bank liquidity tsunami in terms of their capacity to trigger sustainable vol. spikes or widening in credit spreads that’s anything more than fleeting, but policy/geopolitical uncertainty has unquestionably manifested itself in dramatic moves in FX markets.

Eventually, we’ve argued, FX will be the transmission channel through which geopolitical/policy uncertainty finally spills over into equities and credit.

To be sure, this hasn’t happened yet.

Indeed, it was just this week when BofAML produced the following chart that demonstrated the extent to which rates, equity, and FX vol. are all subject to the same (artificial) suppression:


And if you want a more granular look, here’s a handy table from Goldman:


Finally, here’s the CVIX:


Still, you need only look at the overnight session on Tuesday to understand that if you want to express your opinion on all things political or policy-related, FX is the way to go, goddammit.

With all of this in mind, consider the latest missive from former FX trader Richard Breslow who notes that given the current geopolitical environment, “if FX didn’t exist, we’d have to invent it.

Via Bloomberg

Politics is everyone’s business. And no, this isn’t an off-cycle reminder about your responsibility to please get out and vote next time round. Rather, in today’s world there’s nothing local about almost any aspect of the process. And that’s certainly where traders have come down on the issue. Whether it’s normal, violent or extreme political events they are now taken to be fully tradable affairs. Whatever your level of understanding of the people or issues. And if there’s one place to go that makes perfect sense when expressing your “expertise” on all things geopolitical, it’s the foreign exchange market.

  • If FX didn’t exist, we’d have to invent it. If only to allow us to convey our views on how others are managing their affairs. Sounds familiar, right? Using currencies over equities or bonds to play these situations has all the actual benefits that cryptocurrency proponents argue make them ideal versus cash for all your criminal activity needs
  • We don’t often know when a political crisis will rear its head. Not a problem for a 24-hour market. Want to deal anonymously with all the protections of off-shore counter-parties? Not a problem. And, if you think the matter is egregious enough, you can leverage up pretty much to your heart’s content. Provided you aren’t stopped out first, changing your mind is quick and cheap
  • It’s in the DNA of FX traders to feast on a headline and then ask what it’s made of. Speed is of the essence. And there’s no market in the world that is easier to access, by and large has one size fits all universal rules governing how it works, where your money sits and how and when you can get it back. In equities and bonds it’s best to first ask how an individual market works and what paperwork is needed. In FX it’s point and click and your prime broker takes care of everything else
  • FX also doesn’t have any negative connotations associated with shorting something. Every trade involves doing so. You get to attack things without someone questioning your couth. After the U.K. referendum the currency got killed on perceived relative value, but that was all right because the FTSE did just fine. You didn’t see the BOE bemoan the lower pound
  • Of course the other beauty of FX is you can order up an over-the-counter option with whatever bells and whistles are desired. You get the exposure you think you want and your banks are more than happy to accommodate
  • All of these characteristics, and more, make currencies the perfect vehicle to get involved in issues one may or may not actually know anything about. But it also works the most cleanly for hedgers and real money people as well. You can protect yourself while not having to lose your underlying position. Politics is people and country not just asset prices. And this is FX’s specialty

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