that lower liquidity conditions tend to prevail, and adapt accordingly.
North American trading interest and volume generally continue to wind down as the trading day moves toward the 5 p.m. New York close, which also sees the change in value dates take place. (See Chapter 4 for more on rollovers and value dates.) But during the late New York afternoon, Wellington and Sydney have reopened and a new trading day has begun.
Key daily times and events
In addition to the ebb and flow of liquidity and market interest during the global currency trading day (covered earlier in this chapter), 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.
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. (See Chapter 3 for more on fixings.)
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. A currency futures contract specifies the price at which a currency can be bought or sold at a future date. 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. Currency futures are covered in Chapter 14.
The U.S. dollar index
The U.S. dollar index is traded on the Intercontinental Exchange (ICE). The dollar index is an average of the value of the U.S. dollar against a basket of six other major currencies, but it’s heavily weighted toward European currencies.
Euro: 57.6 percent
Japanese yen: 13.6 percent
British pound: 11.9 percent
Canadian dollar: 9.1 percent
Swedish krona: 4.2 percent
Swiss franc: 3.6 percent
The European currency share of the basket — Eurozone, United Kingdom, Sweden, and Switzerland — totals 77.3 percent. From time to time, the currency weightings may be adjusted.
THE RISE OF THE CHINESE RENMINBI
China has been climbing the global economic ranks. At the time of writing, it was the world’s second-largest economy, but the same is not true for the Chinese currency, the renminbi (also known as the yuan). Although the role of the renminbi in global forex trading has surged, according to the 2019 BIS Triennial Central Bank Survey, the renminbi was the eighth most-traded currency in the world, with a share of 4.3 percent in global forex volumes. However, most of this trading activity is for trade purposes only.
The renminbi is a managed currency, which means that the Chinese government controls its value. This makes it very difficult to trade for speculative purposes. Either the currency doesn’t move very much (because it can move only within a controlled band, which means there are few trading opportunities), or the government intervenes out of the blue, creating a wave of volatility that can take you out of your position before you know it.
Most currency brokers allow you to trade the renminbi, but why would you want to? Some people believe that the Chinese government will eventually loosen its control over the renminbi and allow it to trade freely. Due to the importance of the Chinese economy, if the currency could trade freely, the renminbi might become a currency that would be liquid enough to rival the U.S. dollar. For now, though, it doesn’t look like Beijing will embark on a liberal currency regime any time soon.
Warning: A managed currency like the renminbi can be fairly illiquid, so it can experience large price moves if the government suddenly chooses to intervene. Due to this, trading the renminbi is considered risky.
