FX fixing is no Libor scandal - yet
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News that UK regulators are investigating alleged manipulation in FX benchmarks has hit the headlines, but can it be compared to the Libor scandal?
Anybody with even a cursory knowledge of the FX markets knows that the 4pm London fix is likely to generate a spike in the movement of currency rates. That is because it is the time that fund managers fix the price of their currency hedges, most of which are benchmarked to WM/Reuters fixing rates.
It is unsurprising that these fixes cause short-term volatility in FX price movement – they are, after all, the benchmarks to which an estimated $3.6 trillion of investment funds are tied.
That is not to say there will be a spike in movement every day. In EURUSD, for example, US and European fund managers might well have equal and opposite hedging requirements. However, a lot of the time fund managers around the world will find themselves the same way round in their hedging requirements.
As one trader puts it: “If European and US fund managers are all buying Toyota stocks because its new car is the bomb, then they are all going to be buying yen. So watch out.”
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