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Central bank sync puts the forex market to sleep

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Since the beginning of the pandemic, central bank efforts to stabilize the global economy have settled the $ 6.6 trillion daily foreign currency market into one of the sleepiest times on record.

As the economic recovery began to take hold in the spring and summer of this year, stock markets around the world soared and government bond prices fluctuated in anticipation of the direction of monetary policy. On the other hand, prices in the foreign exchange market have remained almost unchanged, and trading volumes have fallen to their lowest levels in months. Exchange rates between the US dollar and the euro traded in the narrowest range on record this year.

This is because central banks have been more or less locked-stepped globally since the beginning of the pandemic, and there are few opportunities for currencies to diverge in a way that creates profit opportunities. Even the market turmoil on Monday caused by the crisis of Chinese developer Evergrande has kept major currencies sticking to the recent range and barely rocking foreign exchange from its sleep.

“Forex markets are exciting when central banks are moving in different directions and when there are policy differences. Currently, all central banks keep policy rates at near zero, at least across developed markets. “Samlington Brown, Head of Developed Market Strategy at BNP Paribas, said.

Differences between currencies have also diminished as central bank policies during the Covid era became the dominant driving force for prices and set aside other typical market-moving factors. Interest rates have always been a top priority for currencies, but the global response to a pandemic means that domestic events such as the German elections do not have the same market mobility as they once did, foreign exchange said. Shahab Jalinos, Global Head of Forex Strategy, said. Credit Suisse.

Forex futures and options market trading volumes fell dramatically in August, the lowest since April 2020, according to the company. CME data.. And it’s not purely a summer deceleration story. It was the latest August since 2009. Broadly speaking, the average daily trading volume of the year is also the lowest since 2009.

A column chart of average daily trading volumes in the futures and options markets. Thousands of units indicating that forex trading volume has decreased this year.

In developed currencies, recent excitement is primarily limited to Australia and New Zealand. Australia and New Zealand are two economies where central banks are much closer to raising interest rates than their peers.

Investors are positioned in many of the same things. Measured volatility in the currency market has been steadily declining since it exploded at the beginning of the pandemic. The euro’s three-month implied volatility against the dollar, a widely tracked gauge of expected volatility in the world’s busiest currency pairs based on option prices, hit its lowest level of the year in mid-September. It sinks and finishes. It is in a record valley from the beginning of 2020. Similar measures against the dollar and the yen are also close to the lowest ever.

The calm period was bad news for investors looking to profit from periods of long-term trends and exchange rate fluctuations. Macro hedge funds betting on bond, currency and commodity movements struggled this year, even among the wider industry renaissance. According to data group HFR, macro fund trading currencies have fallen 1.4% until the end of August this year, but hedge funds as a whole have seen a 10% rise year-to-date.

This dip in Forex could evaporate if the central bank shows that it is ready to change its interest rate policy. “Given the number of issues the market will address over the next year, such as high inflation, central bank rate hikes, tax increases and geopolitical tensions, we don’t think foreign exchange volatility will continue to decline for a very long time.” Said co-head Zack Pandle. Overview of Forex Strategy at Goldman Sachs.

Ulrich Leuchtmann, head of foreign exchange research at Commerzbank, nevertheless could make future interest rate policy changes smaller than in the past, given the size of the debt owed during the pandemic. Said.

“We are very active in whether the Fed will launch lift-offs at the end of 2022 or in early or mid 2023, and the ECB will follow suit in 2024. Opinions are divided on whether to do it or follow it in 2025 .. .. But to be honest, this uncertainty is very small compared to what was once at stake. It’s a long way to go, “said Leuchtmann.

Additional report by Laurence Fletcher and Eva Szalay in London

Central bank sync puts the forex market to sleep

Source link Central bank sync puts the forex market to sleep

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