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Investment focus : Few wake-up signs for snoozing euro
and dollar
LONDON: With all else around it in flux, the world’s biggest
market — the US dollar and euro exchange rate — has virtually dozed
off.
Its relative stasis is as striking as some of the wilder, erratic
market swings elsewhere.
Although frustrating to speculative punters
seeking easy, momentum-based trades, the ambling disposition of the currency
pair is a significant relief for cross-border investors, importers and exporters
who feel less need to hedge against its wild gyrations. It is also one less
headache for governments wary of fresh financial ructions.
Both
governments involved and their central banks may well wish their hard-pressed
exporters could get a competitive leg-up with a weaker currency. But as the
exchange rate is a relative price, neither side is likely to give way to each
other either.
So is this just good behaviour in a smooth functioning
market or a confounding puzzle in the face of huge uncertainty?
After
five years that has seen a once-in-a-generation threat to the global banking
system, unprecedented government debt piles, existential doubts about the euro
zone and the most extraordinary monetary and fiscal policies of the modern era,
the lynchpin exchange rate has, well, not done very much.
It may simply
be that - for all differing narratives - the United States and the euro zone are
basically stuck in the same low-growth mire of debt workouts, deleveraging and
near-zero official interest rates for years to come.
HSBC strategist
David Bloom, for example, reckons the zero rate world in the West has killed the
dominant pre-crisis behaviour of ‘carry trades’, or the snaffling away of major
currencies with relatively higher yields.
It has replaced it with
second-guessing ‘risk on’ or ‘risk off’ modes in world markets.
While the
dollar gains from ‘safe haven’ demand in times of high tension, quantitative
easing by the Federal Reserve boosts risk appetite and weakens the
dollar.
Conversely, the euro tends to benefit from similar European
Central Bank liquidity moves as they reduce perceived euro zone sovereign
default risks and euro breakup fears.
“The world of FX has become one of
perception rather than concrete links,” Bloom told an investor conference this
week.
Metronome: But other strategists put forward dozens of theories —
from fundamental balance of payments valuations, portfolio shifts, central bank
reserve management and changes to market regulation — that all could argue for
moves either way and yet seem to end up in a tug of war that’s left the rate
stuck just about here.
On Friday, the euro/dollar rate - which at the
last official count in 2010 accounted for almost 30 percent of the $4 trillion
per day global currency market turnover - was trading just above $1.30. That’s
where it was six months ago, roughly where it was at the end of last year, and
at the end of the previous year too.
There have, of course, been swings
up and down in the interim, but it’s basically oscillated around the middle of
range between $1.2 and $1.44 for the past four years - less than 10 percent
either side of 1.32.
Strip out the dollar swoon as the Federal Reserve
eased monetary policy on its own frantically in the lead-up to the Lehman
Brothers bust and guess where euro/dollar started 2007? Just little above
$1.30.
Reinforcing that, the options market shows implied 6-month
volatility has fallen well below 10 percent to its lowest level in four and half
years.
Even the long-standing premium on ‘put’ options to sell the euro,
so called risk reversals, has sunk to its lowest level in two years and showing
little or no near-term directional bias.
And if you view the volatility
drop as falling options prices, then it may equally shows a drop in demand for
hedging or speculative plays.
Although partly blamed on the swamping of
the market by high-frequency computer-based trading models that are sidelining
more traditional players, the net effect of all of the above has been a
cratering in market volumes on the main trading platforms by anywhere between 20
and 40 percent in the year to September.
Together with EU countries
moving towards a financial transactions tax, the ‘Volcker Rule’ in the United
States to stop commercial banks engaging in proprietary trading also has or will
take another toll on volume and big directional punts.
More of the same:
So are forecasters bamboozled? Well, many are. But on average, even they seem to
have got used to this seemingly random walk that is ending up in the same place
all the time.
In January, when euro/dollar was trading about $1.29,
Reuters monthly poll of 63 currency forecasters came up with a median forecast
of $1.30 at year end. It looks remarkably prescient right now, but there’s also
a temptation to say the netting of all views is just evening out.
So,
does everyone think euro/dollar just going to hover metronomically around
here.
Reuters latest month poll has a 12-month median forecast of $1.25 -
and so a slightly weaker euro of less than 4 percent over a year.
While
that’s backed up by the latest poll of fund managers by Bank of America Merrill
Lynch, which had 53 percent viewing the euro as overvalued as opposed to 16
percent who thought the dollar was too high, a 4 percent over a year is small
beer.
Put it back to back with year-to-date returns in 2012 of between 30
and 50 percent for 10-year Irish or Portugese government bonds, or 25 percent
for German equities or almost 20 percent on Wall Street, and you get a better
sense of the calm on euro/dollar.
Echoing the view of a currency world
dominated by a perception of asset risk rather than interest rates, Morgan
Stanley’s strategists this week said the universe was now better divided between
high-growth emerging markets and currencies of the western economies now all
reverting together to growth rather than inflation targetting:
“With risk
appetite becoming increasingly important for the performance of currencies, we
believe investors will need to be able to project risk trends in order to
effectively trade FX.” reuters
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Subscribe | Sunday, October 21, 2012
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