British Pound Turbulence on Month-end Fluctuations: JP Morgan
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- Market rates at publication: GBP/EUR: 1.1294 | GBP/USD: 1.3688
- Bank transfer rates: 1.1078 | 1.3400
- Specialist transfer rates: 1.1215 | 1.3592
- More about bank-beating exchange rates, here
A decidedly negative day for Pound exchange rates ahead of the weekend might have something to do with this being the final day of the month.
Month-end market rebalancing can often impact markets in unfathomable ways, and strategists often suggest traders should opt to sit on the sidelines and wait for the month-end phenomenon to play out.
"Month end expected to keep things random and indiscriminate with the backdrop of questionable top of book liquidity," says a note from the spot market trading desk of JP Morgan in London.
The Pound-to-Euro exchange rate is one-thirds of a percent at 1.1285 while the Pound-to-Dollar exchange rate is down 0.22% at 1.3693.
Looking at the performance board, the Pound is in fact the second-worst performing of the G10 currencies on Jan. 29., despite a lack of news concerning the UK or the Pound.
Above: GBP performance on Jan 29.
One peculiarity showing up in the data is that some 'high beta' currencies, i.e. those that would be expected to fall when stock markets fall, as is the case today, are outperforming Sterling. Such 'high beta' currencies would include the Australian and New Zealand Dollars, but even the Rand is outperforming Sterling.
Month-end trading can throw up some strange market moves as it is around this point that normally passive market participants enter the market.
"Long side only funds often make adjustments to their portfolios during the last three to five trading days of a month. Long term investors also review the performance of their portfolios around the same period to decide if adjustments are necessary. There are also the month end option players who actively seeking for trading opportunities," reads an explainer from DayTradingBias.
In addition to month-end, investors are nervous of the apparently destabilising impact retail trader swarms are having. Small traders are swarming to specific companies and causing share price surges, which is in turn burning hedge funds that were betting against the same company.
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While it is entertaining to watch for those without skin in the game, it does nevertheless offer up some destabilising forces to equity markets.
"The wild and wacky gyrations in risk markets continue and drag FX around with them in choppy fashion - high volumes but little net displacement as nervousness prevails," says the JP Morgan note.
Expectations for a volatile close to the week and month were raised after retail trading platforms reinstated the trade of some the most heavily targeted stocks by retail participants, including GameStop and American Airlines, having suspended them on Thursday.
"European markets are on the back foot once more today, with the retail attack on short hedge funds raising fears of a big unwind in the market," says Joshua Mahony, Senior Market Analyst at IG. "One thing is for sure, the Reddit generation have brought significant volatility for markets and provide yet another risk factor to consider for traders."
Above: Major stock markets were in the red ahead of the weekend. Data courtsy of IG.
Once the panic moves have played out, we can look to reinstate our core views. Today though, we have month end flows and with liquidity still an issue, especially in high beta, we could be in for some exciting moves this afternoon," says JP Morgan.
Regarding Sterling specifically, traders at the investment bank reflect that "not too much changing in GBP picture with plenty of focus still on the EU’s calls on AstraZeneca (fuelling the ‘vaccine nationalism’ debate) but this is having little effect on the currency for now, we remain in tactical trading mode for now."
