In addition to the ebb and flow
of liquidity and market interest during the global currency trading
day, you need to be aware of the following daily events,
which tend to occur around the same times each day.
Expiring options
Currency options are typically
set to expire either at the Tokyo expiry (3 p.m. Tokyo time) or the New York
expiry (10 a.m. ET). The New York option expiry is the more significant one,
because it tends to capture both European and North American option market
interest. When an option expires, the underlying option ceases to exist. Any
hedging in the spot market that was done based on the option being alive
suddenly needs to be unwound, which can trigger significant price changes in
the hours leading up to and just after the option expiry time.
The amount and variety of
currency option interest is just too large to suggest any single way that spot
prices will always react around the expiry (there may not even be any
significant option interest expiring on many days), but you should be aware
that option-related interest is most in evidence around the daily expiries.
Setting the rate at
currency fixings
There are several daily currency
fixings in various financial centers, but the two most important are the 8:55
a.m Tokyo time and the 4 p.m. London time fixings. A currency fixing is a set
time each day when the prices of currencies for commercial transactions are
set, or fixed.
From a trading standpoint, these
fixings may see a flurry of trading in a particular currency pair in the run-up
(generally 15 to 30 minutes) to the fixing time that abruptly ends exactly at
the fixing time. A sharp rally in a specific currency pair on fixing-related
buying, for example, may suddenly come to an end at the fixing time and see the
price quickly drop back to where it was before.
Squaring up on the
currency futures markets
The Chicago Mercantile Exchange
(CME), one of the largest futures markets in the world, offers currency futures
through its International Monetary Market (IMM) subsidiary exchange. Daily
currency futures’ trading closes each day on the IMM at 2 p.m. central time
(CT), which is 3 p.m. ET. Many futures traders like to square up or close any
open positions at the end of each trading session to limit their overnight
exposure or for margin requirements.
The 30 to 45 minutes leading up
to the IMM closing occasionally generates a flurry of activity that spills over
into the spot market. Because the amount of liquidity in the spot currency
market is at its lowest in the New York afternoon, sharp movements in the
futures markets can drive the spot market around this time. There's no reliable
way to tell if or how the IMM close will trigger a move in the New York
afternoon spot market, so you just need to be aware of it and know that it can
distort prices in the short term.
