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Inside the Forex Market: Fake News, Currency Wars & Corruption

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Fake News, Read All About It!

Fake news has become one of the buzzwords of 2017, with almost weekly reports regarding politicians or political events, causing outrage due to their spurious nature. The growing importance of social media has exacerbated the problem with fake news reports spreading like wildfire and quickly garnering vast amounts of attention before they can be disputed and or corrected.

The term was widely used during President Trump's election campaign due to both Trump's own incorrect reporting of various facts and figures and also because of CNN's constant fictitious reporting of his campaign. The most famous of these episodes was CNN's incorrect reporting of the number of attendees at Trump's inauguration where they portrayed the event as being virtually empty. CNN have recently come under attack again for allegedly "staging" a protest in the aftermath of the recent London terror attacks.

The purpose of fake-news is typically to gain either financially or politically from the reaction achieved through the spreading of often sensationalist or controversial information.

Information Leaks & Anonymous Comments

Currency traders will be familiar with this concept as the Forex market has long been plagued by false reports, unchecked source comments, and anonymous leaks. These episodes are particularly common during periods of crisis. The European banking crisis, which was at its peak between 2010 and 2014, often saw currency markets whipsawed on the release of ECB leaks, which would later be denied, or source comments which would later be retracted.

During this time, it was not uncommon to see vicious volatility in EUR currency pairs traders reacted to the breaking news flooding their newswires. The common occurrence of these events made it a difficult period for intra-day traders who were often shaken out of positions because of this dynamic.

Verbal Intervention

There are, however, some instances when central banks will purposely use commentary to affect the markets. This is known as a verbal intervention. For example, the SNB's Jordan commonly takes to the wires to announce that the SNB are monitoring the Swiss Franc exchange rate and will act if it continues to strengthen. These comments are designed to deter traders from continuing to buy the Swiss Franc. The ECB are another central bank well known for using verbal intervention to drive the currency rate.

Following the announcement of a huge 1 trillion EUR stimulus program in February 2015, ECB members consistently took to the wires to drive the exchange rate down as it appeared that, despite the stimulus program, EUR was rapidly recovering against the US Dollar.

As you can see in the chart above, each time EURUSD approached the 1.14 mark, various ECB members would hit the wires, weighing on the currency rate.

Currency Wars

The matter of central banks and/or governments, purposely manipulating currency markets has been a hot topic over the last year. Over the course of Trump's election campaign, he frequently declared his intention to label China a currency manipulator. Trump has since dialled back on his claims though many economists that although they no longer fit the bill, at one point (specifically 2000-2014) China was manipulating currency markets to halt the rise of the Renminbi and maintain the country's competitive advantage.

The practice of suppressing currency rates to maintain a competitive advantage has commonly been referred to as a "race to the bottom", where global economies have been engaged in huge monetary easing since the GFC, to maintain their competitiveness and attempt to boost growth. Another phrase often used to describe this practice is "currency wars". In February, the issue of currency wars once again took the limelight as Trump's top trade adviser Peter Navarro accused Germany of profiting from a "grossly undervalued" Euro which he labelled an "implicit Deutsche mark."

Clearly, there is a huge financial gain to be made by anyone who is in a position to profit from leaked reports, false comments and anonymous reporting in the currency markets and indeed, one major issue over the years has been the early acquisition of economic data releases or central bank policy announcements.

Insider Trading

In 2012, Philipp Hilderbrand resigned his position as Chairman of the SNB after it was revealed that his wife, a former hedge fund trader, bought 400,000 Swiss Francs' worth of US Dollars just three weeks before the SNB declared their strategy cap the rise of the Swiss Franc. While Hilderbrand denied claims, many accused the SNB Chairman of giving his wife the information ahead of time to allow her to profit from the announcement.

In April of this year, a recording emerged of two Barclay's bankers in 2008 claiming that the Bank of England was putting significant pressure on commercial banks to keep LIBOR rates suppressed. The LIBOR rigging scandal has been a huge focal point of those seeking to illuminate corrupt banking practices, and this latest revelation once again throws into question the matter of central banks manipulating markets. With so many instances of subversive tactics being used by banks and governments to affect currency markets, the only real question is, who will be next?

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