Here are some random order flow questions that I have received privately. I might as well make the answers available to the public. Names have been omitted.
First Order Flow Question:
I see on 4 cast news on July 12, 2011 0800 GMT. ECB intends to launch a liquidity absorbing tender at 1300 GMT to offset a large positive liquidity imbalance it sees for the day.
What does this mean? I see the the market in EUR/USD started to change direction at 0800 gmt and is sort of stalled out at the 1.4 level which was reached between 12gmt and 13gmt. No big movement at 1300 gmt.
Weekly Refinancing Operations
The weekly refinancing operations are a sort of repurchasing agreement. Let’s say a bank wants or needs cash. They can go to the ECB in these liquidity tenders and request to borrow funds. When the bank borrows the money from the ECB, it needs to hand over collateral. Collateral that the ECB deems acceptable. Usually it is some form of Treasury/Government debt.
It can be short term debt also known as treasury bills which are usually less than two year maturities.
It can be medium to long term debt known as treasury notes which are usually 2-10 year maturities.
It can be long term debt known as treasury bonds which are usually 10-30 year maturities.
So if the ECB deems it acceptable collateral, and they agree on an interest rate that the bank will pay the ECB, then the bank hands over the collateral and the ECB loans them the money. Then whenever the loan matures whether in 7 days or in 28 days, the bank has to legally repurchase the securities/collateral from the ECB. The ECB gets their money back with some interest.
Repurchase Agreement or “Repo”
The repurchase agreement is different from a loan because the bank has to legally repurchase the securities at the end of the loan date. Hence the term “repurchase agreement”, or “repo”
As for the influence on the market. Sometimes the market may be influenced by these liquidity tenders if the market participants believe that it signals something about banks health, risk appetite, or risk aversion. Usually I don’t pay too much attention to them.
I don’t really think the rise in EUR/USD was due to the ECB liquidity tender. If they are just shuffling money around in between eurozone countries, it isn’t going to generate much commercial order flow. It could generate other market participants order flow if they believe the liquidity tender and its results “mean something” as I noted above.
On the other hand if the ECB goes into the debt markets and starts to buy up some of the club Mediterranean debt, then that can signal to the market participants that the ECB can be coming in to prop up the market. That can cause some intraday short covering, also the macro funds can take some profits, etc.
Also the market potentially broke through the 1.3850 small option barrier, with stops below it getting tripped. Small potential intraday exhaustion there. Of course you could of said a similar thing after the 1.3900 barriers, but 1.3840 area was where the market just decided to stall out at temporarily.
Second Order Flow Question:
I have a question about the nzd trade you took though. You mentioned that you wanted to go long on the nzd for a while already and was waiting for an opportunity to do it. However, would u still have gone long on the nzd even if you didn’t have a prior intention to find such an opportunity but rather based on the premise that the market was well bid and bargain hunters came in after the spike down to push price up again?
The question is referring to a NZD/USD long trade that I created a video about. If you are on the email newsletter you should have received it.
The person asks whether I would of still gone long NZD/USD last week just based on the premise that the market was well bid and that bargain hunters would support the prices. That is definitely one possible trade to place. You can go long at support levels or after some small stops are tripped below and then rely on the bids to hold or sentiment to start shifting. That was not the path that I chose.
The path that I chose wast to wait for the market to test the bids first, because I was unsure if it would hold. Also I was unsure of the impact of the earthquake that it might have on the NZD/USD. Sometimes you want to be cautious and wait a few hours to see if there will be damages to the NZ economy, or if their would be tsunami waves, etc. There was very little damage so that is why the market only sold off about 30 or 40 pips or so. If the earthquake caused major damage, then the NZD/USD may have sold off by 100/200 pips as the market factors in reduced interest rate hikes, delayed interest rate hikes, or even potentially a short term interest rate cuts, to boost demand in the economy recovering from a natural disaster. But the earthquake didn’t cause much damage so the market rallied again.
What that down move does is it validates that their are some decent bids there. Also some stop losses were tripped meaning some market players were long and then became flat. Also some macro players who were long may pare their long bets. What this does is frees up some order flow for the bullish assault. Because if NZD/USD starts moving higher, then those market players that got stopped out and those macro players that pared their bets start to regret their decisions and can therefore start to bid up NZD/USD again. When they do, you can sell into them as you have already gone long.
The thinking was that the spike low cleaned out some weak longs that may be enticed to re initiate their long NZD/USD trades if it started moving higher again.
If you guys enjoy these random order flow questions answered, I will post more.