Declining Currency Volume Obscuring Sentiment on Fed, UBS Says

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Trading volume is so thin in the foreign-exchange market that it’s difficult for strategists and investors to analyze the signals behind the price actions.

That’s what Geoffrey Yu of UBS Group AG says. Overall flows of Group-Of-10 currencies fell below average for three consecutive weeks, the bank’s client flow data show. Among the worst were currencies that are traditionally the most liquid, such as the yen, Swiss franc and the Canadian dollar, where volumes were down at least 30 percent.

“If the flow is only 50 percent of its 52-week average, then it’s really only half as meaningful,” Yu, a senior currency strategist in London, said by phone. “Since volumes have come off, it means the interpretation value of flows in currencies is limited.”

At a time when most economists don’t expect the Federal Reserve to raise interest rates until September, and when 20 central banks worldwide have already cut borrowing costs at least once this year, catalysts are almost absent in the $5.3 trillion a day market. Yu said scant trading results in outsized moves, making market movements more difficult to interpret.

Even for the euro versus the dollar, the world’s most-traded currency pair, exaggerated fluctuations are evident. The 14-day average true range, which takes into account the differences between intraday highs and lows, averaged 0.014 in the past month, compared with less than 0.01 in the past year.

“Right now on the traditional drivers, the macro drivers, there may be reasons to hold off,” Yu said. “But given the tail risks coming from different places, especially with Greece on the horizon, people just might be a bit more cautious.”

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