NEW YORK / LONDON, Sept. 27 (Reuters) – Trading in turbulent currency markets is now akin to being in a casino, according to some traders moving through markets that have been chafed as central banks and governments try to repair their economies.
Over the past week, sleep deprived traders have been working bluntly advising clients on remarkable movements in the markets: the British pound fell to a record low, the Japanese monetary intervention to support the falling yen and a deeper appreciation of the euro. fall below the dollar parity.
First of all, the mighty US dollar dominates, the turnover of which has peaked for two decades. Some people see no end to this overwhelming volatility.
“It really feels like a casino now,” said John Doyle, vice president of trade and commerce at Monex USA, who said he is more direct with customers and is extremely cautious about risk.
“We had to be extra vigilant about our internal trading rules to make sure we weren’t taking excessive risks,” said Doyle. “Discipline was the key.”
Deutsche Bank’s currency volatility index – the historic G7 index of volatility of major currencies – jumped on Monday to its highest level in two and a half years at 13.55.
Deutsche Bank’s currency volatility index is the highest in two and a half years
The British Pound fell against the dollar by around 5% in the last two sessions, the worst decline in two sessions since March 2020, comparing it to the generally more volatile emerging market currencies.
The yen remains close to its 24-year low against the dollar, even as Japanese monetary authorities intervened in the foreign exchange markets last week to strengthen the shattered currency for the first time since 1998.
While the pound sterling and the yen performed extremely weakly against the dollar, the dollar’s meteoric rise spared no major currency. Each currency of the G10 has fallen against the dollar this year, on average by about 16%.
“There were certainly a hectic few days and sleep was sorely lacking,” said Michael Brown, head of market intelligence at pay firm Caxton in London. “I’ll blame the pound sterling for this, not my coffee drinking habit, but going to bed at 11:30 and waking up around 3:30 to let the cable (US-GBP ratio) hit record lows was certainly not too much fun.”
The moves surprised longtime currency traders and investors alike.
Akshay Kamboj, co-director of investments at Crawford Ventures, a currency trading hedge fund, said when he expected a profound correction to the pound sterling, “this depth was not expected.”
“Our team works around the clock from many global locations,” said Kamboj, adding that he did not trade in pounds because the direction of the pound now depends entirely on the reaction of the Bank of England.
Volatility is unlikely to stop.
“There seems to be still grounds for more messy moves,” said Bipan Rai, head of currency strategy at CIBC Capital Markets in North America, adding that the driving force will be dollar strength, which depends on how hawkish the US Federal Reserve is. . when raising rates.
The US dollar dominated with rising US interest rates, the relatively strong US economy and the demand for shelter as global financial markets became more turbulent this year.
This has exacerbated the problems around the world.
As the yen is weighed down by the growing gap between the profitability of US and Japanese government debt, the euro hurts over concerns about the energy crisis and its impact on the economy, and the pound is oppressed by fears that the new government’s economic plan will stretch Britain’s finances to the limit. The dollar bulls quickly used their advantage.
While currency traders are no strangers to volatility, the confluence of different risks makes this moment special.
Contrary to March 2020, the last period of heightened volatility when policymakers were united and had largely similar responses to the pandemic, traders now face central banks reacting in their own way as they deal with rising inflation and weakening of the currency.
“It was a macro story in the past, but it is largely a central bank story where everyone is jostling for interest rate hikes,” said Chris Huddleston, CEO of FXD Capital, who used to be a currency and bond trader in the past. Twenty years.
Meanwhile, sustained dollar strength bodes badly for Morgan Stanley-based global financial analysts on Monday’s note.
“The strength of the US dollar has historically led to some kind of financial and economic crisis … If there was ever time to look for something to break, it would be it,” analysts said.
Record Reports Saqib Iqbal Ahmed, Carolina Mandl, John McCrank in New York and Dhara Ranasinghe in London, written by Megan Davies; …