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Forex, Meet Farming

Posted by Joseph Trevisani on Sep 24, 2013 12:36:00 PM

Wall Street Journal, September 24, 2013

By Chiara Albanese

European Pressphoto Agency

Farming and foreign exchange. Two fields (excuse the pun) that rarely overlap, except for on one day each year, forming an annual highlight for sterling nerds. And that day is next Monday.

Every year, the European Union sends an agricultural subsidy to the U.K. This year, it totals roughly €3.3 billion ($5.3 billion), according to the European Commission’s spokesman for agriculture and rural development.

Naturally, those euros need to be switched into sterling. Market convention is that this happens on the last trading day of September. And as the market in trade in the euro against the pound rocks in at around €6 billion a day, it’s a large enough amount to shift the market around.

The market pattern should be simple enough. Which ever bank gets to do the foreign-exchange transaction on Monday has an awful lot of euros to sell, and sterling to buy. So the euro should fall against sterling on Monday. Problem is, it’s not that simple.

“The transaction obviously has potential to impact the market. However, previous years have shown that it is almost impossible to predict the price action, so going short of the cross is by no means a guarantee to make money,” said CitigroupC -0.71% in a note.

Because the annual payment is a well-known market fixture, traders try to cram in all sorts of transactions in the runup, some reasonably betting that the rate will rise as soon as the payment is processed, others trying to get ahead of a slide in the exchange rate.

In short, these few days each year are always a mess. Be ready for some weird moves in sterling over the next few days, and for this to be blamed as the cause.


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