Currency volatility eases as Yellen stays flexible on rate
BETS ON FUTURE PRICE SWINGS ARE DECLINING AFTER CVIX INDEX JUMPED TO 3-YEAR HIGH
Currency traders beware — central banks are damping volatility again. Foreign-exchange market volatility is poised for its biggest weekly drop since 2008 after Janet Yellen said the Federal Reserve’s timetable for raising interest rates is flexible. Last year, when global policy easing pushed swings in exchange rates to record lows, volumes slumped and currency dealers struggled to make money.
Deutsche Bank AG’s Currency Volatility Index fell for a fourth day after the Fed Chair said this week the US labour market was improving even as inflation and wage growth remain too low, and Eurozone finance ministers agreed on Tuesday to extend financial aid for Greece. That left the euro, dollar and yen little changed yesterday as higheryielding currencies and bonds rallied with stocks.
Yellen “has done a fair bit in recent days both to help stop the dollar’s advance and to suck volatility out of the FX market,” Kit Juckes, a global strategist at Societe Generale in London, wrote in an emailed note. “The prospect of a shift in Fed policy promises a move to a sustained period of higher volatility, but the talk of patience, and the emphasis on flexibility when the Fed finally acts, soften that effect.”
Trader expectations for price swings in foreign-exchange markets as measured by Deutsche Bank’s CVIX index fell to 8.94 per cent at 6.38am in New York, the lowest since December 9. The 14.4 per cent decline this week would be the biggest since October 2008.
Less turbulence
Bets on future price swings are declining after the index jumped to a three-year high of 12.48 per cent on January 16, and that may be bad news for currency dealers. While falling volatility means less uncertainty and risk, it also curbs opportunities for traders to profit on changes in exchange rates.
Volatility is falling after Yellen repeated that the Fed’s pledge to be “patient” on starting to raise borrowing costs means an increase is unlikely for “at least the next couple” of meetings. The central bank adopted the guidance in December and repeated it in January.
A rate increase “could be warranted at any meeting,” Yellen said. The Fed has held its target for the federal funds rate at virtually zero since December 2008 to bolster economic growth.
“Yellen’s second day of testimony wasn’t as hawkish as everyone hoped, so while there’s still a chance of a June rate hike, people are now thinking the timing may be a little later,” said Kazuo Shirai, a Los Angeles-based trader at MUFG Union Bank NA. “The dollar continues to see some selling on the back of that.”
Benchmark
Traders see a 56 per cent chance the Fed will raise the benchmark by its October meeting, according to futures data compiled by Bloomberg. That’s down from 59 per cent on February 23.
The dollar has been supported in 2015 by an improving economy. Gross domestic product will expand 3.1 per cent this year, compared with 2.14 per cent across the Group of 10, according to economists surveyed by Bloomberg News.