2018 FX Predictions Report Card

In December 2017, I published 10 Foreign Exchange Predictions for 2018. Now that 2018 has come to a close, it is time for me to grade myself! Overall, I’m giving myself an A-, only receiving two bad grades!

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

Bitcoin is now trading at $3,800, about 75% of its value from a year ago!

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 (mid-December 2017) bitcoin closed at $13,657. 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+

The difficulty here is in trying to quantify this trend. I am really reflecting the new innovations that walk through our doors at MarketFactory. Many centre around greater cross-margining and a moving the prime businesses into the clearing businesses at the banks for greater synergy.

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

As well as the quantitative, public indicators, we can point to the increasing range of asset managers that make enquiries, attend FX conferences and become MarketFactory customers. On this last point, we do expect to on-board new asset managers at an increasing rate concurrent with the roll out of Whisperer Enterprise, our FX API for trading all product types.

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

CLOBs have indeed increased volumes. Some of the largest banks have favoured disclosed venues. However, the entry of new customers to the market using bank supplied, home grown or independent vendor algos has more than made up for some large bank preferences.

  1. Last look will not die. Grade = A

Yes, last look hold times are shorter than a year ago, as shown in the September paper published by EBS: “The FX Global Code: changing transparency and behaviour”. However, we should expect reductions in hold times given increased scrutiny on conduct, as highlighted in the paper but also because of technology advances.

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

The market continues to fragment and does so in even more directions. The July Bank of England six monthly volume reports showed how the market is fragmenting with more instruments being traded, with particular growth in NDFs.

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

Some emerging markets did experience dislocations. One reason that this happens is that some market participants regard all, or a substantial proportion, of emerging markets as a single category. Once they pull orders from one currency pair, they may do so for all emerging markets.  

  1. Pre-trade risk management will become the norm. Grade = B

Yes, increasingly prime brokers are mandating pre-trade risk management by default.

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 = D

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

There are 631 statements of commitment listed on the public registers with others who have signed statements of commitment, but have chosen not to list on public registers.

The Code has been adopted well beyond market expectations and 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.