Currency Trading Skirts Turmoil as Volatility Drops

Traders in the $5 trillion-a-day plus foreign-exchange market have largely sidestepped the rising volatility and turmoil that rocked stocks and bonds this month amid renewed concern the global economy is weakening.

A measure of volatility is poised for its biggest slide since April as price swings in U.S. Treasuries climb the most in a year. While turnover on CME Inc.’s currencies exchange jumped as much as 45 percent above its six-year average, liquidity has remained intact, with the spread between bids and offers below historical levels, JPMorgan Chase & Co. data show.

“The currency market proved that it’s the most liquid and most resilient market in the world, more so than the Treasury market even,” Jens Nordvig, a managing director of currency research at Nomura Holdings Inc., said by phone from New York on Oct. 23. “It would be even more worrying if the currency market became disorderly, but fortunately that has not been the case.”

Confidence is rising in the ability of the market to function normally during periods of stress even after more than 25 traders have been fired, suspended or put on leave since allegations emerged last year that dealers colluded to rig the WM/Reuters benchmark rate.

Litmus Test

The bid-ask spread for major currencies, the difference between the price at which traders are willing to buy and sell, was 0.08 percent this month, little changed from September and compared with a six-year average of 0.11, according to JPMorgan.

In the week ending Oct. 17, when economic concerns surged as the International Monetary Fund cut its growth forecast, average turnover on CME’s exchange jumped to $135 billion, compared with an average of $93 billion since the start of 2008, JPMorgan data show. Volumes eased to $75 billion last week.

“Foreign exchange seems to be retaining its depth, even as other markets, such as bonds, are experiencing slightly more liquidity stress,” John Normand, head of foreign-exchange and international-rates strategy at JPMorgan in London, said last week by phone. “The real litmus test will be whether conditions hold if the global economy has a sustained period of stress.”

Global markets have calmed since mid-month, when a sharper-than-forecast drop in U.S. retail sales added to mounting concerns about the spread of Ebola, the conflict in Ukraine and a downturn in emerging markets.

Volatility Rises

The VIX Index of U.S. stock-market volatility jumped to an almost three-year high of more than 31 percent on Oct. 15, before falling back to about 14 percent yesterday.

Currencies fared better, with JPMorgan’s G-7 Volatility Index rising 8.8 percent on Oct. 15, against a 36 percent surge in Bank of America Corp.’s MOVE Index of Treasury volatility. While the foreign-exchange measure is down 12 percent this month, the gauge of bond swings has climbed 16 percent.

That may prove reassuring in a market where at least a dozen regulators on three continents are investigating whether traders colluded with their counterparts at other companies to manipulate currency benchmarks used by money managers and pension funds.

Investor concerns over global growth also prompted traders to push back expectations of when the Federal Reserve will raise its record-low benchmark interest rate. Futures data compiled by Bloomberg show the odds of rates increasing by October 2015 were at 50 percent yesterday, from 85 percent on Sept. 30.

Bond investors liquidating positions amid diminishing prospects of a boost to U.S. rates contributed to relatively greater stress in debt markets, according to Robert Sinche, a strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, who has worked in the financial markets since the late 1970s.

“The currency market didn’t have huge positions built up like the debt markets had,” Sinche said yesterday by phone. “There’s an underlying activity in currencies that’s just a by-product of global trade. So there’s an economic basis for trading foreign exchange that isn’t necessarily the same for equities, or even fixed income.”

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