10 FX Predictions for 2018: A 6-month Report Card

In December 2017, I published 10 Foreign Exchange Predictions for 2018. We are now half way through 2018 so it is time to see how they are performing and to grade myself. Overall, I’m giving myself an A-, only scoring an F (for now) on one prediction.

  1. Bitcoin: the truth will be told. Grade = A

My contention was that once the CME and Cboe launched bitcoin futures, making it possible to short bitcoin, we would find the “true” value of Bitcoin and that the value would be significantly less than it was then. On the day I wrote the blog post bitcoin closed at $13,657. Today it trades at $6,717!  Was the fall fueled by short positions? That is hard to tell but I’ll take the credit anyway!

An economic research paper from the Federal Reserve Bank of San Francisco appears to reinforce the view that the correlation is more than coincidence and that there was causation.

As a related aside, Harvard University Professor Kenneth Rogoff refers to the long history of private currencies and reminds us that “what the private sector innovates, the state eventually regulates”. There is indeed a long history of private currencies becoming mainstream and eventually being adopted or copied by the state, in one form or another. Is that how crypto-currencies eventually become mainstream?

  1. Major Prime of Primes will become increasingly innovative. Grade = B

Prime of primes are certainly gaining customers and cross-selling other services beyond technology, liquidity and credit. I need to find a way to quantify this trend. I will summarize this further at year-end.

  1. Asset managers will hedge more actively. Grade = A

A recent Aite Group report from late-2017 titled “Credit in FX Markets and the Growing Buy-Side Influence” shows that asset managers in the U.S. and UK have increased their hedging activity, citing geopolitical tensions, over the past few years.

  1. Central limit order books (CLOBs) will enjoy increased volumes. Grade = A

CLOBs have had a very strong year. Volatility is up. Ironically, MiFID II has helped CLOBs. If you must show best execution, one way is to hedge the risk in a CLOB.

  1. Last Look will not die. Grade = A

If anything, it may be becoming more common with “cover and deal” models. Using cover and deal, a market maker may use liquidity from another market participant to satisfy the needs of the market maker’s own customer requirement. A market maker may lean on the other market participant at certain times of day, in certain currency pairs or all the time. The workflow requires last look to ensure that the market maker does not assume risk.

  1. The market will continue to fragment. Grade = A

On the one hand you may argue that Deutsche Boerse’ previous acquisition of 360T and CME’s acquisition of NEX is consolidation, and you would be right. On the other hand, their continues to be a wider range of instruments that are traded directly rather than by legging through other instruments. As an unashamed plug, the new Whisperer 4.0 API provides for a greatly expanded set of instruments.

  1. Discontinuities or flash events that are impactful will become more common. Grade = F

So far this year, I may have been mistaken. Increased liquidity appears to have protected the market from discontinuities.

  1. Pre-trade risk management will become the norm. Grade = B (but I expect an A by year-end)

This is certainly the case. I realize we are talking our own book here with Reflector. The case is hard to argue against: better protection against broken limits and, and far worse, runaway algos. A pre-trade risk tool reduces risk and, over time if not immediately, enables market participants to benefit from higher risk limits.

  1. The market will seek alternatives to fixings. Grade = C

I cannot point to a solution yet, and this may be a more strategic goal. There must be a better way, there has to be.

  1. The Global Code of Conduct will be adopted widely. Grade = A

The Code has been adopted well beyond market expectations. Well over 300 statements of commitment have been signed. The code is bringing clarity to which market practices are good practices and others that are not so. It has been extraordinary to see how the market has pulled together to address its own difficulties and to clarify conduct through a set of principles. Furthermore, it has been accomplished through a unique partnership between the private and public sectors.   Of course, the work continues. I am very proud to have co-chaired the Examples Working Group for the Global Code.

To speak to James Sinclair about his predictions and the FX market in general, email jsinclair@marketfactory.com.