Currency Swings Evaporate as Central Banks Shy Away From Action

  • JPMorgan Global FX Volatility Index drops to two-month low
  • ECB, BOJ, RBA signaling comfort with current policy settings

Expectations for price swings in currency markets fell to a two-month low as central banks disappoint traders hoping for bold policy actions.

A JPMorgan Chase & Co. gauge of global currency volatility headed for its biggest monthly decline since February as traders anticipate the Federal Reserve will delay increasing interest rates until next year. Commodity Futures Trading Commission data last week showed currency positioning is the most neutral in more than five years, JPMorgan said in a note last week. The yen barely budged after a government report showed Japan’s export growth slowed in September.

"Markets have just really given up on taking new positions," said Doug Borthwick, head of foreign-exchange at New York brokerage Chapdelaine & Co. "As long as policy makers are unable to decide, or even communicate where interest rates should move, then that uncertainty means you’re less likely to have positions on the table."

Three-month implied volatility plummets across major currencies

The JPMorgan Global FX Volatility Index was at 9.51, the lowest on a closing basis since Aug. 14.

Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the currency against six major peers, rose 0.1 percent on Wednesday as of 5 p.m. in New York. A five-day average of the gauge that takes into account the differences between intraday highs and lows shrank to the narrowest since Jan. 1. The dollar was little changed at $1.1340 per euro.

Right Amount

Central banks from Europe, Japan and Australia have signaled comfort with current policy settings in recent weeks, while keeping open the prospect of further action. The European Central Bank’s Christian Noyer said this week its quantitative-easing plan represented the right amount of stimulus. Bank of Japan Governor Haruhiko Kuroda said on Monday policy easing was having its intended effects.

Net bullish bets on the dollar have fallen 60 percent from a peak in August as investors pushed back forecasts for when the Fed will raise rates. The probability the central bank will move by its December meeting was at 32 percent, down from 41 percent on Sept. 30, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

“The biggest driver would be the reduced concern about Fed tightening,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “That has caused long-dollar bets to be reduced. It’s pulled back a lot of emerging-market currencies from danger zones back into more comfortable territory.”

The yen was little changed at 119.92 per dollar after the finance ministry said Japan’s export growth slowed to 0.6 percent from a year earlier, from a revised 3.1 percent in August. Imports dropped more than 11 percent, underscoring a lack of demand in Japan’s domestic economy.

The trade data are among the most crucial economic indicators before the BOJ meets Oct. 30 to consider whether to boost monetary stimulus to stoke inflation and growth.

Given comments from Kuroda, expectations for additional easing by the BOJ have declined, “but when you look at the price, it seems like it’s trying to factor in that expectation,” said Akira Moroga, manager of currency products at Aozora Bank Ltd. in Tokyo. “Dollar-yen will probably remain firm until next week’s BOJ meeting, but if there is no easing after all, it will be difficult to justify trading any higher from here.”

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