Doldrums in currency markets unnerves investors

Strategists and traders who make a livelihood from market moves, utter calm can be disconcerting. And extreme calm is what they have. Major exchange rates are fixed in their deepest slumber for years, prompting comparisons to the tranquil period before the 2008 financial crisis along with a good deal of hand-wringing over when action might return.

With gauges of expectations for price, swings have foundered. MUFG’s FX Volatility index for major currencies fell to its lowest point since 2014 last week, which makes current conditions analogous to a 10-month period in 2006 and 2007. The euro dipped under $1.12 this week, but only just, having bobbed just above that point since November. The pound is bound around $1.29. The dollar is fixed just beneath Y112 against the yen. With the most distinguishing quality of FX markets thus far in 2019 is the abnormally low volatility. The spell of sleepiness intensified after the US central bank approved a hiatus in its rate-raising cycle in March, implying that it would not bump up rates again for the rest of the year.

This dovish turn, blended with simmering concerns about the prospect of a global deterioration, means that other leading central banks have likewise turned wary, prolonging the prospect of policy moves. Some traders are indeed missing the relative thrills of Brexit. After the initial March 29 deadline for the UK’s leaving the EU was pushed back to October, apprehensions about the hazards of a “hard” exit have been assuaged. Before that postponement, contracts betting on fluctuations in the pound’s exchange rate were prevalent, as companies and investors seeking to profit from, or hedge against, subsequent shifts in sterling. By mid-April, these decreases were to a substantial extent worthless as the suspension removed immediate risks.

Macro currency funds are down 2 per cent on average in the first three months of this year. A considerable decline after a flat 2018 and a sequence of modest single-digit returns in the preceding four calendar years. Some emerging-markets currencies have likewise increased some interest from bored G10 traders. These currencies come with higher interest rates, which traders can benefit by selling currencies like the euro or the yen and acquiring those with higher yields. This so-called “carry trade” relies on low volatility, as abrupt shifts in prices can remove returns from the differences in interest rates. The protracted, extraordinarily low volatility also means you receive a persistent drip of inflows into high-yielding currencies in the emerging markets.