Silver Swings at Forex

Currencies traders and analysts put forward a large range of flaky explanations for an unexpected run higher in the dollar late Tuesday.

“Errrr dunno. Flows?” was the wobbliest, and yet most frequent explanation.

“Flows”–people buying dollars–would of course push the dollar up, and one-off big deals do sometimes have this effect. But it didn’t smell right at the time, as the boost to the dollar was too broad and too big.

A downgrade to U.S. debt by a Chinese rating agency was another guess, as it could be read as a signal that China wants the U.S. to trim its easing program to support the buck, and get off its case about the yuan. In the run-up to the G-20 summit this weekend, that analysis bore more weight than it possibly might have done otherwise.

Still, to take that as a slam-dunk reason to buy the dollar against pretty much every other major currency required, as one senior London analyst put it, “stretching the elastic band of logic to its limit.”

Now that the dust has settled, a fresh guess is emerging: maybe it was a tweak to the way that silver is traded.

Bear with me–this does make sense.

Tuesday, the Chicago Mercantile Exchange announced it would raise its margin requirements for Comex silver futures by 30%, which means traders have to put up more cash if they want to dabble in the precious metal. That puts some off from playing, and stirs suspicions that a similar move on gold trading could emerge. Silver futures dropped like a stone from the highest levels in 30 years, although they fell back just to the levels seen at the start of this week.

This matters for the dollar for a couple of reasons. Firstly, while it’s a commodities pullback prompted by an unusual and mechanical factor, it still looks to casual observers like a rush out of exactly those risky bets that have run hand-in-hand with the dollar’s decline of the past few months. When that correlation breaks down, even on a super short-term basis, it makes some dollar sellers reverse some bets.

However, the whole incident also stirred memories for some salty sea dogs in the currencies market about Silver Thursday: March 27, 1980.

That was the day the price of silver collapsed as the Hunt brothers–famous speculators at the time–almost brought the financial system to its knees, causing panic in a range of markets.

The Hunts had cornered the market in silver, in a massive bet that hit the skids when the rules on how the metal was traded were tweaked. Hence the echoes this week, and hence the rush into the dollar, which rightly or wrongly, is still seen as a safe retreat in times of stress.

“Margin changes in silver will always revive memories of that,” said Simon Derrick, an analyst at The Bank of New York Mellon, who is long-standing enough to know.

In the grand scheme of things, memories of Silver Thursday are just noise amid a bigger shift in the currencies market: a big fightback in the dollar. The sense that dollar bashing had become overdone, particularly as other major currencies, like the euro, are not exactly without problems themselves, is gaining momentum.

But when traders are hunting around for excuses to extend these new dollar-positive bets, old tales of battle in the silver market are as good as any trigger.

(source:wsj.com)