New JPMorgan Chase Institute Research Reveals Investors’ Trading Behavior in FX Markets around Brexit, 2016 Election & the ...
June 05 2018 - 8:00AM
Business Wire
The directional trading of investors in
reaction to the surprise 2015 SNB announcement can inform central
banks as they weigh market expectations with respect to timing of
announcements and the outcome against desired market impacts
While trading volumes for hedge funds, asset
managers and banks spiked, hedge funds were the only investors
transferring risk during periods of high exchange rate volatility;
others waited for markets to stabilize, suggesting that the
post-event market equilibrium was established without the benefit
of flow information from a wide variety of investor sectors
Today the JPMorgan Chase Institute released its first-ever study
based on a new, proprietary data asset composed of institutional
investor transactions, exploring trading around three recent events
that led to the largest one-day moves in the relevant currencies in
the last 20 years: the Brexit referendum, the 2016 presidential
election and the decision by the Swiss National Bank (SNB) to
remove the Swiss Franc floor.
The report, “FX Markets Move on Surprise News: Institutional
Investor Trading Behavior around Brexit, the US Election, and the
Swiss Franc Floor,” finds that:
- During all three events, trading
volumes for hedge funds, asset managers, and banks spiked, but only
hedge funds transferred significant risk during the volatile
repricing periods, participating in the establishment of the new
market equilibrium. Asset managers, banks, corporates, pension
funds/insurance companies, and the public sector transferred risk
only after exchange rates had stabilized, and therefore did not
participate in the price discovery process or act as a stabilizing
force during these events.
- These results imply that market makers
established a new equilibrium exchange rate without the benefit of
net flow information from a broad set of investor sectors.
- After the SNB removed the exchange rate
floor in a surprise press release, net flows were all
one-way—investors bought the Swiss Franc as it appreciated. During
the reaction to Brexit and the US election, net flows were less
directional—as unexpected results became clear, net flows in Pounds
were mixed and investors bought the Mexican Peso as it depreciated.
- It is likely that investors were all
buying Swiss Francs because the surprise announcement from the SNB
did not allow them to prepare, and this may have exacerbated the
move in the exchange rate.
"The granularity of our transaction data allows us to provide an
inside look at the trading behavior of various types of
institutional investors during these three major market-moving
events. In doing so, we spotlight how the FX market reached a
post-event equilibrium exchange rate, including which investor
sectors transferred risk during the price discovery process and
which sectors waited until exchange rates had stabilized to
transfer risk,” said Diana Farrell, President and CEO, JPMorgan
Chase Institute. "As central banks and policymakers consider
how and when to best announce market-moving policy changes, our
analysis of the behavior of institutional investors can inform
their decisions as they purse the appropriate balance between
transparency in communicating policy actions and other critical
factors, such as maintaining their credibility.”
About the Data Asset
The report leverages a new data asset that includes nearly 400
million institutional investor transactions across all asset
classes, sourced from the Markets division of J.P. Morgan’s
Corporate & Investment Bank. The analysis in this report is
based on 120,000 spot and forward FX transactions in Swiss Francs
(CHF), the Pound sterling (GBP), or the Mexican Peso (MXN) that
were executed in the hours before, during, and after news broke for
each event. It includes measures of trading activity (measured by
volumes) and risk transferred (measured by net flows) by six
different investor sectors (hedge funds, banks, asset managers,
corporates, pension funds/insurance companies, and the public
sector) from all three regions of the globe (Americas,
Europe/Middle East/Africa, and Asia/Pacific), and highlights the
differences in size and pace of investor sector reactions to these
major news events.
Detailed findings from this new research, include:
- Finding One: FX trading volumes for
hedge funds, asset managers, and banks spiked during the three
events. In contrast, volumes for the corporate,
pension/insurance, and public/other investor sectors barely
increased.
- While a spike in trading volumes would
certainly be expected given the importance and market impact of
these three events, corporate, pension/insurance, and public/other
investors (the less active investor sectors) showed little change
in trading volumes on the three event days relative to their
average daily volumes over the prior year, despite the unexpected
outcomes and largest one-day moves in the relevant exchange rates
in 20 years.
- Finding Two: Institutional
investors traded significant amounts of FX risk during the events,
but their net flows alone cannot explain the sharp exchange rate
movements during the repricing periods.
- While institutional investor net flows
coincident with the sharp moves in exchange rates were large, they
were no larger than the net flows that took place after exchange
rates stabilized, indicating that the exchange rate moves just
after the news broke were much larger than net flows alone would
dictate.
- Market liquidity for the three
currencies was likely lower immediately after the news broke, and
this may partially account for the disproportionate impact of net
flows during the repricing periods.
- Finding Three: Only hedge funds
consistently transferred risk immediately after news broke and as
currencies repriced sharply. Other investors transferred
risk but only after exchange rates stabilized.
- Therefore, only hedge funds
participated in the establishment of the post-news equilibrium
exchange rate.
- These results imply that market makers
established a new equilibrium exchange rate without the benefit of
net flow information from all the investor sectors and
regions.
- Finding Four: The active
investor sectors played different roles in each event:
During the SNB event, they all bought CHF, trading in the
direction of the prevailing move in exchange rates; during the
Brexit event their net flows were mixed; and during the US election
event they bought MXN, trading against the prevailing move in
exchange rates.
- In the minutes after the SNB
announcement, hedge funds, asset managers, and banks all bought CHF
as it appreciated sharply and potentially amplified the move in
exchange rates, likely because the surprise announcement did not
allow investors to prepare. There is evidence in the data that, on
balance, hedge funds transacted as if they expected the EUR/CHF
floor to remain in place up until the day it was removed.
- These same three investor sectors had a
mixed reaction during Brexit, as their net flows reflected both
buying and selling in GBP as it depreciated, and during the US
election event they were buying MXN as it depreciated. The timing
of the Brexit referendum and the US election were well known,
giving investors the opportunity to transact ahead of the events
and account for all possible outcomes.
- Finding Five: Within each
investor sector, there was considerable variation in trading
behavior during each event.
- Regardless of the magnitude of the net
flows at the investor sector level, there are both buyers and
sellers of considerable size within each active sector.
- This within-sector variation refutes
the idea that all investors in a particular sector transacted in
the same direction at the same time during these three events.
- Finding Six: Banks and hedge
funds traded higher volumes outside of their normal business hours
and outside of a currency’s local market; other investor sectors
did not.
- Bank and hedge fund trading volumes
spiked compared to average volumes during the overnight hours for
both GBP and MXN, a marked change in trading behavior. These same
two investor sectors were also the most willing to trade outside of
their normal business hours.
- Asset manager trading volumes only
spiked during US trading hours, 10 to 20 hours after the news broke
for both the Brexit referendum and the US election.
About the JPMorgan Chase Institute
The JPMorgan Chase Institute is a global think tank dedicated to
delivering data-rich analyses and expert insights for the public
good. Its aim is to help decision makers–policymakers, businesses,
and nonprofit leaders–appreciate the scale, granularity, diversity,
and interconnectedness of the global economic system and use better
facts, timely data, and thoughtful analysis to make smarter
decisions to advance global prosperity. Drawing on JPMorgan Chase
& Co.’s unique proprietary data, expertise, and market access,
the Institute develops analyses and insights on the inner workings
of the global economy, frames critical problems, and convenes
stakeholders and leading thinkers. For more information visit:
JPMorganChaseInstitute.com
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version on businesswire.com: https://www.businesswire.com/news/home/20180605005319/en/
ContactJPMorgan ChaseCaitlin Legacki,
202-585-3702Caitlin.A.Legacki@jpmorgan.com
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