Currency Trading For Dummies. Kathleen Brooks

and the importance of Japanese data to the market, much of the action during the Asia-Pacific session is focused on the Japanese yen currency pairs, such as USD/JPY and the JPY crosses, like EUR/JPY and AUD/JPY. Of course, Japanese financial institutions are also most active during this session, so you can frequently get a sense of what the Japanese market is doing based on price movements.

      For individual traders, overall liquidity in the major currency pairs is more than sufficient, with generally orderly price movements. In some less liquid, non-regional currencies, like GBP/USD or USD/CAD, price movements may be more erratic or nonexistent, depending on the environment. With no Canadian news out for the next 12 hours, for example, there may be little reason or interest to move that pair. But if a large market participant needs to make a transaction in that pair, the price movement may be larger than normal.

      Trading in the European/London session

      About midway through the Asian trading day, European financial centers begin to open up and the market gets into its full swing. European financial centers and London account for over 51 percent of total daily global trading volume, with London alone accounting for about one-third of total daily global volume, according to the 2019 BIS triennial survey.

The European session overlaps with half of the Asian trading day and half of the North American trading session, which means that market interest and liquidity are at their absolute peak during this session.

      News and data events from the Eurozone (and individual countries like Germany and France), Switzerland, and the United Kingdom are typically released in the early-morning hours of the European session. As a result, some of the biggest moves and most active trading take place in the European currencies (EUR, GBP, and CHF, or Swiss franc) and the euro cross-currency pairs (EUR/CHF and EUR/GBP).

      Asian trading centers begin to wind down in the late-morning hours of the European session, and North American financial centers come in a few hours later, around 7 a.m. ET.

      Trading in the North American session

      Because of the overlap between North American and European trading sessions, the trading volumes are much more significant. Some of the biggest and most meaningful directional price movements take place during this crossover period. On its own, however, the North American trading session accounts for roughly 28 percent of global trading volume.

      The North American morning is when key U.S. economic data is released and the forex market makes many of its most significant decisions on the value of the U.S. dollar. Most U.S. data reports are released at 8:30 a.m. ET, with others coming out later (between 9 and 10 a.m. ET). Canadian data reports are also released in the morning, usually between 7 and 9 a.m. ET. There are also a few U.S. economic reports that variously come out at noon or 2 p.m. ET, livening up the New York afternoon market. (See Chapter 9 for more details on individual economic data reports.)

      London and the European financial centers begin to wind down their daily trading operations around noon ET each day. The London or European close, as it’s known, can frequently generate volatile flurries of activity. A directional move that occurred earlier in European trading or the New York session may be reversed if enough traders decide to take profit (selling out or exiting long positions) or cover shorts (buying back short positions). Or the directional move may extend farther, as more traders jump onboard before the end of the trading day. There’s no set recipe for how the European close plays out, but significant flurries of activity frequently occur around this time.

On most days, market liquidity and interest fall off significantly in the New York afternoon, which can make for challenging trading conditions. On quiet days, the generally lower market interest typically leads to stagnating price action. On more active days, where prices may have moved more significantly, the lower liquidity can spark additional outsized price movements, as fewer traders scramble to get similarly fewer prices and liquidity. Just as with the London close, there’s never a set way in which a New York afternoon market move will play out, so traders just need to be aware that lower liquidity conditions tend to prevail, and adapt accordingly.

      

Lower liquidity and the potential for increased volatility is most evident in the least-liquid major-currency pairs, especially USD/CHF and GBP/USD.

      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.

      

As you can see, in terms of volume, London is the center of the forex world, but plenty of opportunities exist during the New York and Asia-Pacific sessions. As a general rule, if you trade during the Asian session and no major data releases or events have taken place, the themes from the U.S. session the day before tend to prevail. When the European session comes around, there are usually a few meaty events to move the markets and create new themes — likewise during the U.S. trading session.

      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.

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 if you do notice some volatility around 10 a.m. ET, it may be due to the expiry of some currency options.

      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