The growing chorus of government officials around the world bemoaning the inflated levels of their currencies is proving to be a bonanza for traders.
A JPMorgan Chase & Co. index that tracks volatility measures by options in the $4 trillion-a-day foreign-exchange market has risen almost 2 percentage points from a more than five-year low in December, led by developed-nation currencies such as the dollar, yen and euro. At the same time, the Chicago Board Options Exchange Volatility Index tracking price swings in stocks has fallen.
From Thailand to Russia and Costa Rica, officials are expressing alarm over the appreciation of their currencies as increased monetary easing in the U.S., Japan and other developed nations spurs demand for high-yielding assets found largely in emerging markets. Rising volatility creates more opportunity to profit for traders, who saw foreign-exchange revenue slide last year as central-bank policies aimed at spurring growth through low interest rates stifled movement between currencies and cut volumes by $300 billion a day.
“It’s not a one-way bet for the major currencies anymore,” Doug Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York, said in a Jan. 16 telephone interview.
The Swiss franc fell against the euro today to the weakest since the central bank imposed a cap on the currency in 2011. The yen has tumbled 17 percent in the past six months, based on Bloomberg Correlation Weighted Indexes. The gauges show the dollar has depreciated 3.4 percent in the same period, while the pound has weakened 1.9 percent.
Central banks see lower currencies as a way to boost exports and bolster their economies amid austerity measures, high unemployment and low business confidence.
The World Bank in Washington cut its global growth forecast for this year to 2.4 percent, down from a June forecast of 3 percent. It halved its forecast for Japan, cut the U.S. projection by 0.5 percentage point and predicted a second year of contraction in the euro region. It also lowered projections for emerging markets led by Brazil, India and Mexico.
The combination of interest rates at or about record lows in the U.S., Europe and Japan diminished the allure of the dollar, euro and yen, the three most-traded currencies. In addition to Switzerland, nations such as Brazil established controls on exchange rates, making it less lucrative to trade foreign exchange.
“The Japanese government has come out and said they want to weaken their currency while people feel things in Europe are being rectified,” Chapdelaine FX’s Borthwick said. “For trading purposes, this is tremendous news.”
Daily trading as measured by CLS Bank, operator of the largest currency-transaction settlement system, fell 6 percent to $4.72 trillion in the third quarter from a year earlier.
Foreign-exchange funds overall lost 1.5 percent for the year through November, according to Parker Global Strategies LLC, which tracks about 40 programs. Four of the largest U.S. actively managed currency funds with positive results in 2012 averaged a 3.7 percent return in 2012, compared with a 16 percent gain in the Standard & Poor’s 500 Index.
“Volumes of trading went down the toilet last year,” Steven Barrow, head of Group of 10 research at Standard Bank Plc, said in a phone interview from London yesterday. “So far this year, things are far more active. It was hard for managers to make reasonable returns in major currencies last year.”
The Global Currency Program fund at FX Concepts LLC was up 0.4 percent last year through November, the New York-based firm’s most up-to-date return figures show. That was an improvement from a 19.4 percent loss in 2011, while below its annualized return of 6.8 percent since March 2001.
While increasing, volatility is still relatively low. The JPMorgan Global FX Volatility Index was at 8.83 percent as of 11:52 a.m. in New York, up from last year’s low of 7.05 percent in December and compared with the average of 10.7 percent since the beginning of 2000. It reached as high as 27 percent during the financial crisis in October 2008.
The company’s developed markets gauge jumped to 9.15 percent from December’s low of 7.06 percent. The emerging markets index was 7.04, after declining to 6.8 percent on Jan. 14, it’s lowest since 2007.
Investors in some emerging-markets currencies, such as the Hungarian forint, Indonesian rupiah and Turkish lira, may be underestimating the risk of greater fluctuations as slower growth may curb foreign capital and weaken exchange rates, according to Stephen Jen, former head of currency strategy at Morgan Stanley.
“For some of these currencies, there’s still a lot of downside,” Jen, the managing partner at hedge fund SLJ Macro Partners LLP in London, said in a telephone interview on Jan. 16. “As growth slows, people will start to distinguish between the weaker countries and more robust emerging economies. Then we’ll see quite dramatic differences in performance.”
Political leaders in emerging markets have repeatedly complained about strong currencies as a result of loose monetary policies in the developed world. The world is on the brink of a fresh “currency war,” a Russian central-bank official said this week as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.
“Japan is weakening the yen and other countries may follow,” Bank Rossii First Deputy Chairman Alexei Ulyukayev said at a conference on Jan. 16 in Moscow.
Russia’s central bank has bought 15.1 billion rubles ($499 million) of foreign currency in the two weeks since Jan. 8 to stem the ruble’s advance after abstaining from interventions in December, Bank Rossii data show.
The Philippines followed South Korea last month in imposing restrictions on trading non-deliverable currency forwards as the peso strengthened to the highest level since 2008. The central bank intervened in the foreign-exchange market and is focused on containing inflows from speculators, Governor Amando Tetangco said in a speech in Manila on Jan. 15.
Implied volatility on three-month peso options fell to a record low of 4.53 percent the same day.
Brazil’s central bank has used currency derivatives to buy dollars when the real appreciated, and sell them when it fell and stoked inflation pressure. That has kept the real between 2 and 2.15 per dollar since July and pushed the volatility measure to a record low of 6.95 percent in November.
Costa Rica plans to reduce interest rates to discourage capital inflows after the colon reached the strongest in almost five years. Thailand’s baht retreated from a 17-month high yesterday after Finance Minister Kittiratt Na-Ranong said the exchange rate is “not at a good level” and exporters will face difficulties should it strengthen further.
Currency pairs such as “the euro-franc, which had low volatility last year as it was constrained by central-bank policy, should see more volatility as there is now a two-way trade with the franc not just viewed as a safe haven,” Daragh Maher, a foreign-exchange strategist at HSBC Holdings Plc, said in a Jan. 16 interview.