(MENAFN- Gulf Times) Some of the most violent swings in currency markets during the past five years are showing signs of abating, and that's bad news for traders seeking to recover from their worst month since 2011.
Measures of how volatile the market expects trading to get are dropping as central banks reassert their commitment to predictable policies while global growth slows. That's left implied volatility for the euro against the dollar in the next three months trailing actual fluctuations by the most in more than six years.
"When things move you get on the back of it and, until things do, you end up treading water," said Alastair Smith, a partner at Harmonic Capital Partners, a London-based hedge fund with about $1.8bn under management. One of Harmonic Capital's currency-managed products has lost 0.5% since December 31.
Volatility accelerated late last year at the fastest pace since the financial crisis as the US curtailed stimulus while policy makers from Europe to Japan embraced it. Tensions in Greece and China also fuelled swings. Now, with governments in both nations acting to reassure markets, and the Federal Reserve promising a gradual path to higher rates, price moves are easing.
Three-month implied volatility in the European shared currency slumped to 9.8% on July 17, the lowest since March. Realized swings climbed to almost 14% this month, the most in five years, and were at 10.2% on Monday.
And currency-trading profit has vanished. The Parker Global Strategies LLC index of returns fell 2% in June, the worst month since August 2011. Currency managers have lost 1.2% this year, erasing almost half of 2014's gains.
History shows a lack of volatility is often to blame. Returns had a 0.92 correlation with price swings during the past year, according to indexes from Parker and JPMorgan Chase & Co, where a reading of 1 would indicate the two moved in lockstep.
"The name of the game right now is to be very conservative and avoid massive losses and, in the absence of volatility and clear changes in the macro picture, that means small positions," Luca Avellini, a partner at London-based JCI Capital, which actively manages about $100mn of currencies, said by phone.
Wide-ranging moves in currencies have abated as the sudden opening of a gulf between monetary policy in the US and Europe has been fully articulated. The euro has gained about 1% versus the dollar during the past three months, marking relative stability after falling 20% over the past year.
"You have to wonder what's not already discounted in the markets and what's going to generate a new round of big moves and volatility," Robert Sinche, a strategist at Amherst Pierpont Securities in Stamford, Connecticut, said by phone. As negotiations between Greece and its creditors raged, traders put their faith in central bankers' power to limit any contagion.
ECB President Mario Draghi recommitted policy makers to maintaining stimulus via their ‚¬60bn ($65bn) a month quantitative-easing programme through at least September 2016. The Bank of Japan has maintained plans to expand the monetary base at an annual pace of ¥80tn ($644bn) since October in an effort to stimulate the economy.
Fed Chair Janet Yellen told Congress last week that higher borrowing costs would probably be appropriate later this year if the economy evolves as expected. She also said subsequent rate increases would be gradual.
"Their ideal is that the market prices in the first rate hike and when they raise rates nothing happens," Paul Mortimer- Lee, chief economist for North America at BNP Paribas in New York, said by phone.
"Expected volatility of central bank action, which is an important contributor to volatility in the markets as a whole, is very low because they've told you, 'We're going to do this.'"
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.