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Wednesday, December 3, 2014

Wall Street Journal: "Central Bank Moves Rattle Currency Markets"

Central Bank Moves Rattle Currency Markets


FOREIGN EXCHANGE



Japan, Europe Diverge From Fed, Fueling Forex Volatility as Growth Slows and Commodities Fall



Currency swings are being driven by sharply diverging central bank policies, stagnating growth across much of the world and tumbling commodity prices.
By ANJANI TRIVEDI

Updated Dec. 3, 2014



Big swings are rippling through the $5 trillion-a-day currency market as traders grapple with sharply diverging central-bank policies, stagnating growth across much of the world and tumbling commodity prices.



On Wednesday, a rallying U.S. dollar pushed the yen to its weakest level in seven years, and analysts predicted the slide is far from over.

....


The Australian dollar fell to more than a four-year low and the Malaysian ringgit hit its lowest level in almost five years, after suffering its biggest two-day loss since the Asian financial crisis in 1998.



Indonesia’s rupiah slumped to its lowest since 2008 and the Russian ruble has suffered record falls.



The Deutsche Bank Currency Volatility Index, a broad gauge of expectations of price swings in nine major currency pairs, hit its highest level in more than a year Tuesday.



Money managers say the wild moves are particularly noticeable now compared with recent years, when central banks in the major developed economies were all pursuing aggressive easy-money policies, leaving little room for traders to exploit differences in interest rates.



But now the market is becoming increasingly sensitive to changes in economic indicators and political unrest.



And prospects of slowing economic growth have meant that currencies—especially the euro and those that are linked to commodity prices—are set to face stronger headwinds next year, analysts say.



The euro slipped to a two-year low Wednesday. Currencies of countries that are large oil exporters, from Nigeria’s naira to the Mexican peso, have fallen as the price of crude has weakened.



ENLARGE



The moves are being magnified because central banks around the world are moving in opposite directions, investors say.



The U.S. Federal Reserve has ended its bond-buying program as it prepares to lift interest rates, making the U.S. dollar more appealing. By contrast, central banks in Japan and Europe have gone the other way and injected more cash to lift their flagging economies, in moves that devalue their currencies.



Over the past few years, accommodative monetary policy and a sea of cash it has created have encouraged debt-fuelled investment to nudge growth higher, especially in emerging markets. “When debt rises beyond a certain level, this stockpile begins to weigh on both economic growth as well as inflation, creating a vicious cycle,” analysts from Morgan Stanley wrote in a note. These “unfavorable circumstances” are now showing up in currency markets, they said.



Foreign-exchange trading platforms are reporting their busiest days in years with bets on the U.S. dollar at record highs. Returns at currency-trading funds are moving into positive territory.



“Because volatility has picked up, there is more participation in currency markets and therefore, more positioning,” said Chris Brandon, founding partner at Rhicon Currency Management in Singapore.



“When nothing was happening in foreign exchange, people were like ‘why get involved,’ but now it has started moving and positions have built up, that is going to increase the sensitivity to external influences.”






Mr. Brandon says his fund has made money where many others have, by betting against the Japanese yen and the euro.



EBS, one of the largest electronic currency-trading platforms, reported its busiest day in three years after the Bank of Japan surprised markets and announced additional monetary easing at the end of October.



Total daily volume reached $250 billion. The firm noted that because volatility has increased so much, seven out of 10 of their busiest trading days of the year were in the past three months.



“We’ve gone into a new phase now, and everything seems very reactive,” said Geoff Kendrick, head of foreign exchange and rates strategy at Morgan Stanley.



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