Market anomalies are understood as unusual conditions in financial markets. There are various causes, including geopolitical events, central bank intervention, changes in a country’s interest rates and so on. Knowing about market anomalies and how they are characterized can be very useful in minimizing the negative impact of these market conditions. Therefore, in this article, we will discuss market anomalies, starting from their definitions, the factors that cause them, and examples from the past.
For further discussion of market anomalies, let’s look at the following reviews:
Definition of Market Anomaly
Market anomaly is a condition that does not normally occur in financial markets, such as forex, stocks, crypto and commodity markets. Because it doesn’t usually happen, we will have quite a hard time finding it through the price movement charts of an asset. But, usually every year there are always some market anomalies that occur, even though we cannot predict when they occur.
Anomaly conditions are basically formed by the same mechanism as normal market conditions. The mechanism behind the market anomaly is the tug-of-war between market demand and market supply. It’s just that, these events occur when the market is in a state of high volatility. So that the impact is very significant on price changes.
The difference with normal market conditions is that normal markets have high liquidity and low volatility. So even though there is a tug-of-war between the forces of market supply and demand, the price movement will be categorized as sideways if the two forces are balanced and trending if one of the forces (demand or supply) is more dominant.
Factors Causing Market Anomalies
Market anomalies in the context of the forex market can occur due to several factors, including:
1. Central Bank Intervention
The central bank is a financial institution whose job is to maintain the stability of the value of the country’s currency. In some circumstances the central bank will enter the foreign exchange market and intervene to maintain the value of its currency. That way, a country’s currency will not fall, even though there are many parties selling on a large scale.
Central bank intervention can create market anomalies. When many of the market participants sell a currency, normally the currency will fall. However, as the financial authority tasked with stabilizing the value of the domestic currency, the central bank prevented this fall by purchasing domestic currency using foreign exchange reserves. If the central bank succeeds in doing this, the value of the currency will appreciate again.
2. Changes in Interest Rates
Changes in interest rates are factors that can trigger market participants to buy and sell a currency. This is usually done by investors, when interest rates rise and investment returns increase, they move their funds from a country to a country that raises interest rates, because they are considered more profitable. And vice versa when interest rates are lowered, investors will also move their funds from that country to other countries where investment returns are more profitable.
Changes in interest rates may not and can create market anomalies. Any anomaly that occurs from changes in interest rates, usually also caused by central bank intervention. Market participants generally act as sellers and create a large supply of a currency. Meanwhile, the central bank acts as a buyer and creates market demand for a currency to offset existing supply.
3. Geopolitical Events
Geopolitical events are the same as changes in interest rates. These events can trigger a sell-off by market participants and cause the supply of currencies to increase significantly. Geopolitical events also cannot create market anomalies. Anomalies will only occur when the central bank is strong enough to intervene to contain the supply wave generated by the majority of market participants.
Examples of Market Anomalies that Have Occurred
Market anomalies are inherently rare, especially if the market has a high level of liquidity. Like major pairs or major currency pairs in the forex market, these pairs are the most traded, so their liquidity is very high. And because of that, it is rare to find market anomalies in that market.
The market anomaly itself had occurred with Gold / XAUUSD on August 9, 2021. The type of anomaly that occurred at that time is often referred to as a flash crash, which is a condition where the market fell significantly, but also rose significantly again.
In addition, an anomaly has also occurred with USDCHF in the second week of January 2015. The value of the Swiss Franc (CHF) jumped in early January 2015 because the Swiss National Bank (SNB) decided to stop its currency intervention since 2011.
Previously, the SNB had been massively selling Swiss francs and buying other foreign currencies to keep the value of the Swiss franc low and help Swiss exports. However, in early January 2015, the SNB announced that it would end the intervention, which caused the value of the Swiss franc to spike sharply against other foreign currencies, including the euro.
This decision created an anomaly in the forex market, especially in the USDCHF currency pair. And here is a picture of the price chart when the event occurred:
One of the main causes of price anomalies in forex trading is the difference between supply and demand. If the demand for a particular currency is higher than the supply, the price of that currency will increase. Conversely, if the supply is higher than the demand, then the price of the currency will decrease.
In addition, there are several other factors that can cause price anomalies in forex trading, including the monetary policies implemented by a country’s central bank, changes in interest rates, changes in commodity prices, as well as political and economic events that occur in a country.
In general, price anomalies in forex trading occur due to changes in fundamental factors that affect the value of a country’s currency. Therefore, traders should pay close attention to economic and political developments in the countries whose currencies they trade, in order to be able to predict future price changes.
Apart from fundamental factors, there are also technical factors that can cause price anomalies in forex trading. These technical factors include changes in the level of price volatility, as well as market tendencies to move in certain patterns.
Technical analysis is a method that can be used to predict future price movements by using historical price data, trading volume and other technical indicators. However, keep in mind that technical analysis may not always provide accurate results, especially if it is not combined with proper fundamental analysis.
Price anomalies in forex trading can occur at any time, and traders must always be prepared to deal with unexpected price changes. So indeed traders must have the right strategy and manage risk well in order to minimize potential losses that may occur.
