Currency Traders Seek Clarity as Policy Gaffes Stoke Volatility

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If there’s one thing currency traders want from politicians and central bankers in the second half of the year it’s more clarity -- and fewer gaffes -- on policy direction.

The headlines from the Greek talks are the latest example: the euro tumbled after Prime Minister Alexis Tsipras was reported by a Greek official last week to have said creditors rejected his latest reform proposal, only to rally when it emerged that wasn’t quite what he meant. From Barack Obama and Angela Merkel to the governor of the Bank of Japan, officials the world over have made, or had attributed to them, comments that moved currencies in ways they apparently didn’t expect.

The policy flip-flopping has made the first six months of 2015 a difficult period for predicting foreign-exchange rates, with major currencies off by an average 6 percent from where they were forecast to be at the end of last year. That compares with a 4.5 percent variation in the first half of 2014.

“The nasty price action of recent months will have many traders wondering if it’s safer to ignore most commentary from policy makers, rather than trying to trade on the headlines,” said Sean Callow, a strategist at Westpac Banking Corp. in Sydney.

Rising Volatility

The unanticipated announcements, gaffes and the rest have kept foreign-exchange markets volatile this year, with developed nations showing the biggest price swings.

A JPMorgan Chase & Co. index of volatility in Group-of-Seven currencies has averaged 10.2 percent in 2015, up from 7.2 percent for the whole of last year and the most since the euro debt crisis in 2011. The gap between that gauge and an emerging-market measure is approaching the widest level this year.

The reason investors are particularly sensitive to officials’ pronouncements is that ultra-loose monetary policies in Europe and Japan have sparked a new round of devaluations to boost competitiveness, known as currency wars.

The euro erased its gains on June 24 when a Greek government official told reporters that Tsipras said his proposed reforms had been rejected. The single currency was rallying again two hours later after it emerged the Greek leader had actually said that only some creditors had rebuffed his proposal.

Greek Drama

The euro fell 0.5 percent Tuesday to $1.1181 as of 10:24 a.m. New York time, almost wiping out Monday’s advance. The situation in Greece has deteriorated since the end of last week and June 30 marks the expiry of the nation’s current bailout package as well as the deadline for a payment to the International Monetary Fund.

Europe and the euro have been the battleground for many of the policy surprises in recent weeks.

German Chancellor Merkel sent the currency sliding on June 12 after she said a strong euro makes it hard for nations like Spain and Portugal to benefit from reforms. BNP Paribas SA said her words were ironic because Germany is benefiting the most from the euro’s 18 percent decline over the past year.

“When the country with the world’s largest current-account surplus and an already undervalued exchange rate calls for further currency depreciation, you have to laugh,” Paul Mortimer-Lee, chief economist for North America at the French lender’s New York office, wrote in a June 18 note entitled “Mrs. Merkel’s bad joke.”

Kuroda Bazooka

The dollar slumped as much as 1 percent on June 8 after a later-denied report that U.S. President Obama said the strong dollar could become a problem. The alleged remarks to delegates at a G-7 summit in Germany, which were relayed to reporters by a French official, were debunked by Obama the same day.

BOJ Governor Haruhiko Kuroda triggered the yen’s biggest rally this year when he said June 10 that the currency was “unlikely to weaken further in real effective terms.” He pulled a U-turn within a week, saying that his comments weren’t aimed at influencing the exchange rate.

Switzerland set the scene for this year’s policy shocks back in January, when it scrapped its exchange-rate cap and sent the franc soaring to a record. Days earlier, the central bank’s vice president had called the currency ceiling a “pillar” of monetary policy.

“It’s an every-man-for-himself era of central banks,” said Grant Williams, an industry veteran who’s worked in financial markets for 30 years, including stints as a trader at banks including UBS Group AG and Banc of America. “Any minor change now by a central bank will create massive ripples through markets.”