Rate cuts, Trump could thaw currency markets in deep freeze
Traders and investors are looking to global interestrate cuts and a closelyfought U.S. election to drag the world’s currency markets from their deepest lull in almost four years.
Measures of historical and expected volatility — how much prices move over a set time period — have sunk in recent months with the world’s biggest central banks stuck in a holding pattern, depriving F◣ traders of the divergent moves between regional bond yields on which they thrive.
Deutsche Bank’s closelyfollowed implied currency volatility gauge is around its lowest in two years, and not far off prepandemic levels.
“The music isn’t playing in F◣ so far this year,” said Andreas Koenig, head of global F◣ at Amundi, Europe’s biggest asset manager. “U.S. (bond market) rates go up and down, but the others all follow, and therefore we have no change in differentials.”
“Who’s cutting first and how far... and then the U.S. elections, will be the F◣ events, the big macro events,” Mr. Koenig said.
Slowly stirring
Central banks are slowly stirring. The Swiss National Bank in March was the first major central bank to lower borrowing costs this cycle. The Federal Reserve,
European and Bank expected this year.
Although U.S. yields have risen in recent days as investors reined in bets on
Central Bank, of England are to follow later
Fed rate cuts after strongerthanexpected data, euro zone bond yields have largely followed suit.
“What would lead to any real volatility is increased differentiation among central banks,” said Samuel Zief, head of global F◣ strategy at JPMorgan Private Bank, although he said that’s unlikely in the first half of the year, with European and U.S. inflation following a broadly similar path.
Trump card
Donald Trump also looms large, last year floating the idea of a 10% universal import tariff should the former U.S. President regain the White House and in February adding he could slap levies of 60% or more on Chinese goods. “Tariffs, extra tax, means the dollar could get stronger,” said Themos Fiotakis, global head of F◣ strategy at Barclays, adding the euro and the Chinese yuan would likely suffer.
Barclays thinks the dollar could rally 3% on the back of tariffs in the event Mr. Trump secures a second term and has even said the euro could drop to parity with the U.S. currency.
Me. Trump and Joe Biden currently appear neck and neck, suggesting heightened volatility in the $7.5trillionaday global currency market as opinion polls swing in the run up to November’s election.
Oliver Brennan, F◣ volatility strategist at BNP Paribas, said options, which let investors bet on currency prices, suggest traders are bracing for moves in the Mexican peso , Polish zloty and the yuan, all of which tumbled after Mr. Trump’s 2016 victory. “Volatility in the ninemonth to oneyear range (for those three currencies) is really high, and because nothing is happening now, volatility is really low,” he said.
“If you look at any currency there is a kink around the November election, but the kink is huge in those three.”
Limiting opportunity
For now, the volatility slump is limiting opportunities. “Looking at our risk today, substantially less than the longterm average is allocated to currency,” said Jamie Niven, senior portfolio manager at Candriam.
Volatility in the pair is at its lowest since 2006. There are, however, signs rate moves are beginning to drive pockets of volatility. The Bank of Japan raised rates for the first time in 17 years in March, but that didn’t stop the yen tumbling to near its lowest since 1990 as traders realised Japanese borrowing costs would stay near zero.