Regulatory investigations of alleged currency-market collusion are probably contributing to a slump in volatility in major foreign-exchange markets, according to Steven Barrow, Standard Bank Plc's head of Group-of-10 research.
The probes, together with limits on speculative trading in the wake of the global financial crisis, may be damping market reactions to events such as the geopolitical tension in Ukraine, London-based Barrow wrote in an e-mailed note to clients today. That may boost the appeal of trading more-volatile emerging-market currencies, he said.
“The uncovering of alleged improper conduct, with respect to currency fixes, could have left dealers scared of their own shadow,” Barrow wrote. “A big question is whether this weight of legislation, moral suasion and fines has the market running scared, with banks, in particular, either unable or unwilling to respond to shock events with the same gusto.”
Currency traders are struggling to make money amid subdued price swings and trends in developed markets, with Deutsche Bank AG’s Currency Returns Index sliding 0.3 percent this year. The euro has never started the year in a tighter trading range versus the dollar than it did in the past two months, according to data compiled by Bloomberg.
At least a dozen regulators on three continents are investigating whether currency traders colluded with counterparts to manipulate benchmarks and more than 20 traders have been fired or suspended across the industry.
“This crackdown has occurred in the major financial centres,” Barrow wrote. “What this might have done is to limit risk-taking in developed currencies in these centres while emerging-market centres have experienced next to no such official pressure and, as a result, emerging currencies have remained pretty volatile.”