Currency Traders: The Fed Has No Clothes! Part 3
(Or, in other words: What’s Going To Happen With the US Dollar?)
I told him I honestly didn’t know what they were going to do, but my position should tell him where I thought the dollar was headed. We walked out back to the trading desk together and watched as the rest of the senior traders started to build short US dollar positions against their own currencies. I asked him if he was going to sell any dollars. He just laughed and told me he had been limit short since I started selling Monday and he had started selling more this morning after his mate in London called. He already had a nice sized short position.
Near the end of the trading day, we got a call from a friend that traded at a Swiss bank. His name was Bernie and when Bernie called and told us he was ‘on maneuvers for the Swiss Army,’ that was his way of saying that he was dealing because he had ‘inside information’. He didn’t tell us anything other than that he was ‘on maneuvers’ and then asked for a price. He sold US$ 5 million to us so we would know he was bearish on the US dollar against the German Marks. To all of us that had been around and seen Bernie operate right before ‘official’ announcements’ or surprise government actions and laughed at his rumors, only to see he generally took positions right before abnormally large moves occurred, Bernie’s call was the final confirmation: If Bernie was calling, something official was likely to be announced soon.
After the US stock market closed that afternoon, the rumors began to get specific: there was going to be a meeting of all the key central banks in New York this coming weekend and they were going to make a major announcement concerning the dollar. There was no official confirmation, but the rumors were now persistent and we saw a steady flow of selling by customers that usually had inside information.
There was very little for me to do at this point. I had been short dollars since Monday morning and had added at every opportunity. I was as short as I wanted to be and at a price that was well above where the cash market was currently trading in both the German Mark and the Japanese yen. And I had finished building the bank’s short US dollar position the day before; it, too, already had a tremendous profit in it. But if these rumors proved to be true, the current profits would be small change after the weekend.
Later that evening, there was official confirmation that the world’s largest central bankers would be meeting in New York and they expected to release a communiqué after the meeting’s conclusion concerning a new coordinated economic policy, particularly targeting the value of the US dollar.
Although the US dollar continued to slip against the major currencies the rest of the week, the official announcement that there was going to be a meeting in New York by the world’s central banks seemed to take some of the frenzy out of the markets. A sort of eerie calm settled over currency markets and the volume going through the markets on both Thursday and Friday was much less than the volume on Monday, Tuesday and Wednesday. On our currency desk, our traders all had their positions, and because their positions were at much better averages than the current rate, there was little stress or pressure on them; the traders had all settled in to wait for weekend’s announcement and its implications.
The details of the Plaza Accord came out over the weekend, with a spokesman from each of the G-5 countries presenting their own statement. The focus of the coordinated policies was indeed the value of the US dollar. Now we all waited for the Asian markets to open, to see what effects the statements would have on the currency markets and whether the central banks would match their words with actions.
The cash currency markets open with trading in New Zealand and Australia at roughly 3 pm Sunday afternoon in Chicago. The central banks of both of these countries openly sold US dollars aggressively against the major currencies on the open and announced that they were actively intervening to lower the value of the dollar—something that was unprecedented. Those traders that didn’t believe the rumors of an important central bank meeting and change in policy going into the past weekend were now believers and tried to jump on the bandwagon by aggressively selling US dollars against the major currencies.
When the Japanese markets opened, the Bank of Japan [‘BOJ’] aggressively sold US dollars against the yen and also sold dollars against the German Marks—and following the lead of the Australian and New Zealand central banks, the BOJ made press announcements with each fresh round of coordinated sales of US dollars. As the markets opened one by one, the rate of decline of the dollar accelerated, as more and more traders tried to chase the trend.
There were similar rounds of fresh selling throughout the night and announcements each time by the central banks involved. It was obvious they wanted the most ‘bang for their buck’ and they were intervening as noisily as possible, hoping to draw in more and more sellers of dollars. And of course, the dollar was in a literal free fall for days.
The handful of traders that got the visits from the Finance Ministers on Monday and Tuesday were unofficially told later that the strategy had been to identify four or five major traders and make certain they were interested in creating large short US dollar positions early in the week. They then hoped that at least some of these traders would clue in a few of their larger clients or contacts once they had built their own sizeable short US dollar positions. And of course, human nature being what it is, these contacts or clients would then tell others and the message would then rather quickly become disseminated. Looking back on that week, the central banks were alarmed early on because the traders they had chosen didn’t do much talking—it became clear early on they’d have to make a few phone calls and do a little leaking themselves, and so they called the second tier central bank traders and gave them just enough information to get them initiating new short US dollar positions. And it was this activity that ultimately started the rumors that continued to build all week long.
More in part 4…
By Timothy Morge
Saturday, June 28, 2008
Sunday, June 22, 2008
Currency Traders: The Fed Has No Clothes! Part 2
(Or, in other words: What's Going To Happen With the US Dollar?)
I woke out of a sound sleep that evening when the phone rang. It was the Head of Trading at our Tokyo office. He had just had a visit from the bank of Japan's Finance Minister [The BOJ as we called them]. Their conversation sounded very much like the conversation I had had earlier in the day with the 'Buba' Finance Minister. I had been instructed not to pass on the details of that conversation to any traders or managers nor was I to speak about the bank's currency position, so I did not tell him about my earlier encounter or the bank's current long German Mark position. He updated me on current prices, then wished me well and I went back to sleep.
I managed to sleep the rest of the night without interruption and then headed back to the bank. When I arrived on the trading floor at 5 am, it was dark and quiet. I turned on a screen, checked prices and noted that both my own position and the bank's position had appreciated overnight and then began my pre-trading preparations.
Around 10 am, my secretary walked out onto the trading floor to find me, which was a rare occurrence. My wife knew that talking to me during the trading day was relatively useless, since getting me to concentrate on anything other than trading during the day was futile and my secretary did a great job of screening everyone but my wife. My secretary told me the president of the bank had a visitor and he would like me to meet him at his private dining area for lunch around 11:30.
The visitor turned out to be a Minister from the bank of Japan. He was 'passing through Chicago' and wanted to stop by and speak with his good friends. As lunch progressed, he asked me what I thought about the US dollar's recent fall from all time highs. I told him I had been very favorable to the dollar during the run up, but its turn down had been quite impressive and orderly and I felt it would likely continue for some time. He agreed and told me that the 'BOJ liked the yen' and then continued eating. At the end of lunch, we shook hands and he again told me the 'BOJ liked the yen'. I told him I agreed and lunch was quickly ended.
Several hours later, I got the same phone call as I had the day before. Before he even asked, I told him I was now also long a good amount of yen against the US dollar. I told him I had not taken profits on any of my German Mark position, but I had added to the bank's German Mark position earlier in the day when it briefly pulled back. The president asked for a P&L number and then told me the bank Risk Committee would also like to have a significant long yen position against the US dollar. I was also told that if at any time I wished to take profits on my current positions, I should simply transfer the position to the bank's position. I was reminded again not to speak with the other traders or managers about either the bank's or my own position in either currency; nor was I to speak to anyone about the two meetings I had been in and what had been said.
The US dollar continued to trade lower against the major currencies the rest of the day but there was little excitement in the market. My instincts told me something was going on in the background but there were little if any signs that whatever it was had started, except for the two visitors in the past two days delivering a similar sounding message. Once the trading day was done, I balanced my accounts and went home to make dinner. I slept through the night with no phone calls, which gave me much needed rest.
As I pulled into the bank parking lot at my normal time, I noticed there were a few more cars than normal in the lot for that early in the morning. And when I got to the trading floor, I noticed that there were quite a few pools of light scattered around the still-darkened trading floor and I could hear other traders already discussing the markets. I put my briefcase in my office and walked down to the trading desk. I stopped one of the senior traders and asked why he was in so early and he replied he had heard from a friend in London that something was up-something with the central banks-so he decided to come in early and see what the market was doing.
I walked around the trading desk and talked to a few other traders and managers and there was now a definite buzz in the market that something was up, but no one seemed to have a real idea what it might be, just that the central banks were involved. I continued to keep my information to myself but listened intently, wondering where and when the 'buzz' had started.
About 9:30 that morning, my Canadian dollar trader walked over and told me quietly that she had heard from her contact at the Bank of Canada that 'a lower US dollar' against the major currencies was favored by all the central banks. The statement wasn't anything new, I told her, but then she told me that her contact had called her 'out of the blue' and offered the opinion. It seemed strange but it wasn't much to go on, I told her.
By then, my short US dollar position against the German Mark and Japanese yen had grown to about US$ 10 billion and the total size of the position I was trading for myself and the bank's Risk Committee was approaching US$ 50 billion. I had a good amount of profit in both positions and it looked like things were just beginning to heat up.
Several minutes later, the head of our marketing desk called me over and told me he had just gotten off the phone with a good client of ours, a central banker from one of the South American countries that had good sources within the larger central banks. He called and sold a good amount of US dollars against both the German Mark and Japanese yen, then told my marketer that he was very bearish on the US dollar against the major currencies. We generally heard from this small central bank trader when real news was about to take place-he was the sort that had good information and loved to piggyback off it for profits, so I took his phone call as a real sign that something official was likely to happen, and probably sooner rather than later.
I walked into my office and called upstairs. Fifteen minutes later, we assembled all the senior currency traders in the trading floor conference room and vaguely described the rumors going round and the Risk Committee's opinion on the situation. We did not recount our visits from the Finance Ministry officials-because if something 'official' did end up happening and we leaked the information that would be the last time we got a visit prior to the event. We then told the senior currency traders that their position limits had been tripled until further notice as long as they were short US dollars against their currency.
As I walked out of the conference room, one of my best traders gently grabbed me by the elbow and held me back in the room until it emptied. Then he asked me if I could tell him what was going on. I told him that we'd just told him all there was to tell and he smiled and said, 'this must be a big one. The whole desk has been watching you sell dollars continually since Monday. You haven't bought back a single buck! Now the rumors are starting and I got a call this morning from one of my mates in London telling me there was going to be an announcement this afternoon by the central banks. The dollar's been falling for six months-what are they going to do?'
More in part 3.
By Timothy Morge
(Or, in other words: What's Going To Happen With the US Dollar?)
I woke out of a sound sleep that evening when the phone rang. It was the Head of Trading at our Tokyo office. He had just had a visit from the bank of Japan's Finance Minister [The BOJ as we called them]. Their conversation sounded very much like the conversation I had had earlier in the day with the 'Buba' Finance Minister. I had been instructed not to pass on the details of that conversation to any traders or managers nor was I to speak about the bank's currency position, so I did not tell him about my earlier encounter or the bank's current long German Mark position. He updated me on current prices, then wished me well and I went back to sleep.
I managed to sleep the rest of the night without interruption and then headed back to the bank. When I arrived on the trading floor at 5 am, it was dark and quiet. I turned on a screen, checked prices and noted that both my own position and the bank's position had appreciated overnight and then began my pre-trading preparations.
Around 10 am, my secretary walked out onto the trading floor to find me, which was a rare occurrence. My wife knew that talking to me during the trading day was relatively useless, since getting me to concentrate on anything other than trading during the day was futile and my secretary did a great job of screening everyone but my wife. My secretary told me the president of the bank had a visitor and he would like me to meet him at his private dining area for lunch around 11:30.
The visitor turned out to be a Minister from the bank of Japan. He was 'passing through Chicago' and wanted to stop by and speak with his good friends. As lunch progressed, he asked me what I thought about the US dollar's recent fall from all time highs. I told him I had been very favorable to the dollar during the run up, but its turn down had been quite impressive and orderly and I felt it would likely continue for some time. He agreed and told me that the 'BOJ liked the yen' and then continued eating. At the end of lunch, we shook hands and he again told me the 'BOJ liked the yen'. I told him I agreed and lunch was quickly ended.
Several hours later, I got the same phone call as I had the day before. Before he even asked, I told him I was now also long a good amount of yen against the US dollar. I told him I had not taken profits on any of my German Mark position, but I had added to the bank's German Mark position earlier in the day when it briefly pulled back. The president asked for a P&L number and then told me the bank Risk Committee would also like to have a significant long yen position against the US dollar. I was also told that if at any time I wished to take profits on my current positions, I should simply transfer the position to the bank's position. I was reminded again not to speak with the other traders or managers about either the bank's or my own position in either currency; nor was I to speak to anyone about the two meetings I had been in and what had been said.
The US dollar continued to trade lower against the major currencies the rest of the day but there was little excitement in the market. My instincts told me something was going on in the background but there were little if any signs that whatever it was had started, except for the two visitors in the past two days delivering a similar sounding message. Once the trading day was done, I balanced my accounts and went home to make dinner. I slept through the night with no phone calls, which gave me much needed rest.
As I pulled into the bank parking lot at my normal time, I noticed there were a few more cars than normal in the lot for that early in the morning. And when I got to the trading floor, I noticed that there were quite a few pools of light scattered around the still-darkened trading floor and I could hear other traders already discussing the markets. I put my briefcase in my office and walked down to the trading desk. I stopped one of the senior traders and asked why he was in so early and he replied he had heard from a friend in London that something was up-something with the central banks-so he decided to come in early and see what the market was doing.
I walked around the trading desk and talked to a few other traders and managers and there was now a definite buzz in the market that something was up, but no one seemed to have a real idea what it might be, just that the central banks were involved. I continued to keep my information to myself but listened intently, wondering where and when the 'buzz' had started.
About 9:30 that morning, my Canadian dollar trader walked over and told me quietly that she had heard from her contact at the Bank of Canada that 'a lower US dollar' against the major currencies was favored by all the central banks. The statement wasn't anything new, I told her, but then she told me that her contact had called her 'out of the blue' and offered the opinion. It seemed strange but it wasn't much to go on, I told her.
By then, my short US dollar position against the German Mark and Japanese yen had grown to about US$ 10 billion and the total size of the position I was trading for myself and the bank's Risk Committee was approaching US$ 50 billion. I had a good amount of profit in both positions and it looked like things were just beginning to heat up.
Several minutes later, the head of our marketing desk called me over and told me he had just gotten off the phone with a good client of ours, a central banker from one of the South American countries that had good sources within the larger central banks. He called and sold a good amount of US dollars against both the German Mark and Japanese yen, then told my marketer that he was very bearish on the US dollar against the major currencies. We generally heard from this small central bank trader when real news was about to take place-he was the sort that had good information and loved to piggyback off it for profits, so I took his phone call as a real sign that something official was likely to happen, and probably sooner rather than later.
I walked into my office and called upstairs. Fifteen minutes later, we assembled all the senior currency traders in the trading floor conference room and vaguely described the rumors going round and the Risk Committee's opinion on the situation. We did not recount our visits from the Finance Ministry officials-because if something 'official' did end up happening and we leaked the information that would be the last time we got a visit prior to the event. We then told the senior currency traders that their position limits had been tripled until further notice as long as they were short US dollars against their currency.
As I walked out of the conference room, one of my best traders gently grabbed me by the elbow and held me back in the room until it emptied. Then he asked me if I could tell him what was going on. I told him that we'd just told him all there was to tell and he smiled and said, 'this must be a big one. The whole desk has been watching you sell dollars continually since Monday. You haven't bought back a single buck! Now the rumors are starting and I got a call this morning from one of my mates in London telling me there was going to be an announcement this afternoon by the central banks. The dollar's been falling for six months-what are they going to do?'
More in part 3.
By Timothy Morge
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