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4 Jun 2014
The FX crisis: Market needs to be 'Fed' fresh clues
FXStreet (Bali) - The uncommon calm in the FX market, with turnover and volatility reaching ridiculously low levels, continues to be a major concerns for traders, which find it increasingly frustrating the inability to see much follow through moves.
The current regulatory probes into alleged currency manipulation at the largest dealing banks has led to a sudden deprivation in how information on order flow is being shared, with these banks no longer allowing instant messaging in chat rooms.
As Steve Barrow, strategist at Standard Bank, quoted by the Financial Times, notes: “If currency traders shy away from such ‘information trades’, for fear of reprisals . . . it seems reasonable to think that currency volatility might fall as well.”
While there is talk that hedge funds have been filling the gaps amid the absence of heavier involvement by dealing banks, it is undeniable that the Forex probes currently underway are a negative contributing factor, yet not the crucial one, as the events occur in a context of an uncertain macro theme, in which most central banks still remain sidelined awaiting to take major decisions on interest rates.
So what does it take for traders and the broader investment community to re-engage in market activities? The market needs to develop new macro-themes, so that traders can confidently start discounting such future scenario, as the current difficulty to decipher new divergences in central bank policies is definitely having a huge impact on the depressed levels of activity seen.
While market dynamics have drastically changed to those seen post the GFC era, how the market operates, prices future events and its overall structure, unless direct central bank intervention on a particular currency as seen by the BoJ post GFC, that remains intact.
One of the pivotal problems is the lack of clarity on the Fed's monetary policies. Failure to clearly telegraph when rate hikes may come is a major source of uncertainty for market participants, leading to uncommitted involvement in the world's reserve currency, the US Dollar. And since most of the FX turnover is generated in G10 vs US Dollars, failure to define a clear trend in the latter amplifies the perception of a slow, choppy market.
Evidence that markets are not that different can be found in the NZD and GBP moves from late last year and early 2014, with markets picking up the divergences perceived in their central banks' policy intentions, and subsequently, expressing these views through strong up-trends. However, the RBNZ hiking cycle or the probable tightening by the BoE in Q4 2014/Q1 2015, that is not enough to eliminate the perception of such low volatile markets.
What the market really needs, other than additional policy definition by the rest of central banks (ECB, BoJ, BoC, SNB, RBA), is to either receive clearer clues from the Federal Reserve on the possible timing of an awaited hiking cycle, or instead, further definition in policy by the five mentioned central above. Another possibility would be a return to the RORO theme (Risk on-Risk off), although such environment, when it occurs, it tends to cause sharp short-lived spikes off the mean rather than establishing a new trend.
For now, with Fed policies still dependent on fundamentals, which at the moment provide mix signals, and most other central banks still in a 'wait and see mode', currency investors are likely to see the low volatility extend, thus the need to adapt to the new normal.
The current regulatory probes into alleged currency manipulation at the largest dealing banks has led to a sudden deprivation in how information on order flow is being shared, with these banks no longer allowing instant messaging in chat rooms.
As Steve Barrow, strategist at Standard Bank, quoted by the Financial Times, notes: “If currency traders shy away from such ‘information trades’, for fear of reprisals . . . it seems reasonable to think that currency volatility might fall as well.”
While there is talk that hedge funds have been filling the gaps amid the absence of heavier involvement by dealing banks, it is undeniable that the Forex probes currently underway are a negative contributing factor, yet not the crucial one, as the events occur in a context of an uncertain macro theme, in which most central banks still remain sidelined awaiting to take major decisions on interest rates.
So what does it take for traders and the broader investment community to re-engage in market activities? The market needs to develop new macro-themes, so that traders can confidently start discounting such future scenario, as the current difficulty to decipher new divergences in central bank policies is definitely having a huge impact on the depressed levels of activity seen.
While market dynamics have drastically changed to those seen post the GFC era, how the market operates, prices future events and its overall structure, unless direct central bank intervention on a particular currency as seen by the BoJ post GFC, that remains intact.
One of the pivotal problems is the lack of clarity on the Fed's monetary policies. Failure to clearly telegraph when rate hikes may come is a major source of uncertainty for market participants, leading to uncommitted involvement in the world's reserve currency, the US Dollar. And since most of the FX turnover is generated in G10 vs US Dollars, failure to define a clear trend in the latter amplifies the perception of a slow, choppy market.
Evidence that markets are not that different can be found in the NZD and GBP moves from late last year and early 2014, with markets picking up the divergences perceived in their central banks' policy intentions, and subsequently, expressing these views through strong up-trends. However, the RBNZ hiking cycle or the probable tightening by the BoE in Q4 2014/Q1 2015, that is not enough to eliminate the perception of such low volatile markets.
What the market really needs, other than additional policy definition by the rest of central banks (ECB, BoJ, BoC, SNB, RBA), is to either receive clearer clues from the Federal Reserve on the possible timing of an awaited hiking cycle, or instead, further definition in policy by the five mentioned central above. Another possibility would be a return to the RORO theme (Risk on-Risk off), although such environment, when it occurs, it tends to cause sharp short-lived spikes off the mean rather than establishing a new trend.
For now, with Fed policies still dependent on fundamentals, which at the moment provide mix signals, and most other central banks still in a 'wait and see mode', currency investors are likely to see the low volatility extend, thus the need to adapt to the new normal.