What really drives the foreign exchange markets

If you’ve spent any time observing the financial markets, or watched the talking heads on Business Sunday, you’ve probably gained the impression that currency markets are driven by fundamentals – interest rates, trade balances – or maybe by technical factors – moving averages, candlesticks, the entrails of a goat.
Nope. What really happens was best illustrated around midday today, Australian eastern time.


About five minutes before midday (UTC+10), the pound sterling (GBP, sterling, cable, or whatever other name it goes by) suddenly plummeted sixty points in about five minutes. A rumour was flashing around the markets that the London Underground had been attacked by suicide bombers.
It was spectacular. Suddenly, nobody wanted to bid for pounds any more. The bottom fell out of the market. Sellers were everywhere…
Until people realised that when it’s midday in Australia, it’s about 3am in London. The Tube doesn’t run at 3am. Why would people be blowing it up? The market for pounds stood up, shook itself, and blipped back up to a few points below where it was trading before the rumour.
A few hours later, London woke up, heard the rumour – and laughed. They’d heard it all before – five days ago, on the BBC’s Panorama. Panorama ran an investigative special on whether London was prepared for a terrorist attack, using a dramatised example of an exploding chlorine tanker in the East End… and suicide bombers on the London Underground.
So the next time someone argues with you about whether the United States’ trade deficit is going to send their dollar spiralling downward, tell them this story – and point out that if anything’s going to send a currency down the toilet, it’ll be a trader who’s not quite paying attention to Fox News or CNN. (Unless, of course, it’s that old favourite – a trader leaning on his keyboard.)
We now return you to your regularly scheduled reviews of shiny toys.

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