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Correlation Challenges for FX Traders

07:00 December 14th 2016 in Media, Videos

Correlation Challenges for FX Traders

Isaac Lieberman, CEO of Aston Capital Management, talks to Profit & Loss deputy editor, Galen Stops, why it’s hard to find uncorrelated markets to trade right now.

[Video clip]

“Volatility is very compressed right now because there’s a lot of central bank activity and markets are very highly correlated,” says Lieberman. 

He adds that the FX market needs a “theme” that will cause it to break away from other markets, but that in the meantime “we’re certainly waiting for volatility to return”.

Lieberman says it’s become very hard to find uncorrelated markets, with equities, rates and FX all trading in unison and therefore dampening volatility. One reason for these correlations is the lack of interest differentials, but he also highlights central bank intervention as another factor that is causing this.

“Even when you saw Brexit, when the market hit a certain low and started to recover you could tell that was not a natural trading market arena, you could tell that there was certainly interventionalist activity occurring,” observes Lieberman.

Speaking at Profit & Loss’ Forex Network Chicago conference, Lieberman was on a panel discussing “Is the Free Liquidity Party Over?” and here he argues that FX liquidity has been rationalised and that the expectation now is that “there’s a cost of doing business that people are prepared to pay”.

Continuing on the theme of liquidity trends, he also says that bank and non-bank liquidity now looks very similar.

“The key reason why algos and technology is being used to access liquidity is because when markets become electronic the most efficient way is to use electronic tools to trade into them. Previously, people were trading manually into electronic markets, which wasn’t very efficient and there was a lot of slippage. But now the liquidity from the buy side as well as the banks really looks the same,” he says.

Watch the full interview here:

[Video Clip]