How To Trade Currencies With Thin Liquidity?

When prices move against the prevailing sentiment, for no reason, it's an opportunity to make money.
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Giles Coghlan
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Trade Currencies With Thin Liquidity

Just taking a look at the Antipodean currencies, we’ve seen the sudden spike in the New Zealand dollar and the Australian dollar, just taking a look here, you can see them on the US dollar counterparts.

You’ve got the New Zealand dollar spiked higher and the Australian dollar spiked higher. So just had some questions in the terminal. You know, what’s the reasons for those spikes? Well, first of all, there’s no clear obvious driver for those reasons, it’s not like a news announcement, there isn’t a news flow, it is most likely to be due to something that’s called illiquidity.

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So in the current markets, these current markets are really unusual times, we’re seeing large ranges, currency pairs that were moving 80 to 100 points in a day are now moving 400, 500 points in a day. The market is very concerned about the spread of Coronavirus.

So we’re seeing large sells and lots of strong orders moving in. Now, most likely, what’s happened is there’s a pocket where there isn’t any orders. So when price moves into these sort of, almost like air vacuums, and then price can just accelerate through them, looking for the next order. So that was one of the reasons why you might have seen, this is 150-point spike up in the Aussie/US dollar pair, which just goes to show you how large these ranges are, so that’s the best explanation that I can think of, it’s due to illiquidity.

Similar to what could happen on a Sunday evening, you open up a terminal and you can suddenly see a price move 20, 30, 40 points for no apparent reason, and it’s a similar kind of market environment, you might get gaps and also you do get algorithmic traders now.

They’re machines that can automatically withdraw their orders, so sometimes, if you see a large spike of 100 points, some of the algorithms will turn themselves off. So that can make the illiquidity markets worse, so you know, there’s no orders, they wouldn’t be like a sell limit order there, which suddenly gets removed from the market, but that’s the most likely example. We’re seeing at the extreme selling off now. I was looking around trying to find out what the reason.

The other explanation that we heard in the squawk is there were also some bids into the SMP 500, and bids into, so just hear some bids coming off the bottom there, and some bids in copper here. I don’t find any of that convincing, but that’s just some of the other reasons that I’ve heard, most likely reason is illiquidity. In terms of our New Zealand dollar, Japanese Yen pair, we can still expect, sellers are still expected from the 63, 70, 80 region.

So that is an opportunity for selling and stops just above the recent highs 6440, 6450 would make sense for the rest of the session.

So in terms of our trade outlook, it hasn’t changed our trade outlook for any of our currency pairs and we are maintaining an alert. And, of course, if I do find out what the reason for that spike is, I will of course, let you know.

 

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