First Taste of 2016 Currency Swings Has Traders Hungry for Moreby and
China stock plunge, Mideast tensions prompt volatility surge
JPMorgan Chase says wider price moves offer opportunities
After the worst annual performance since 2011 for currency managers, exaggerated price swings during the first two trading days of the year have traders on alert.
Investors returning to their desks saw foreign-exchange volatility jump to the most in a month as Chinese stock markets plunged and tensions escalated in the Middle East. Morgan Stanley says swings will persist after averaging the most in four years in 2015. While Deutsche Bank AG sees a “minor retreat” in volatility, it says more turmoil may come from China and rising U.S. interest rates.
Foreign-exchange funds are looking to better capitalize on volatility after bets on monetary-policy divergence disappointed in 2015. Last year, some of the price swings came from unscheduled events, such as China’s August devaluation of the yuan, Switzerland’s decision to scrap its currency cap and plummeting commodity prices, which all prompted traders to react rather than anticipate.
“With volatility comes opportunity, because it’s easier to make money when the market’s moving,” said Roger Hallam, London-based chief investment officer for currencies at JPMorgan Asset Management, a unit of JPMorgan Chase & Co. that oversees $1.7 trillion. “A disciplined investment process facilitates being able to identify profitable trends or lean into erratic price action,” said Hallam, who expects the dollar to broadly strengthen during the first quarter.
A JPMorgan gauge of currency volatility rose to 10.03 percent on Jan. 4, close to the index’s annual average of 10.08 last year, the most since 2011. The measure, which fell to a record-low average of 7.32 percent in 2014, was at 9.99 percent as of 2:33p.m. in New York.
Currency markets were buffeted last year by speculation the Federal Reserve would raise rates in contrast with global peers, including the European Central Bank and the Bank of Japan. A Parker Global Strategies LLC index that tracks top funds in the industry lost 2.3 percent last year, the worst performance since 2011, after the Fed failed to raise rates as soon as some traders expected.
The euro slumped to a one-month low of $1.0711 on Tuesday after an inflation report highlighted the under-performance of economic growth in the single currency bloc versus the U.S. It was little changed Wednesday. Policy divergence is poised to continue, with the U.S. central bank signaling it may raise rates four times this year.
“2016 is likely to see high asset volatility with central-bank-policy divergence, an expensive U.S. dollar becoming even more expensive and political uncertainties acting as the catalyst," said Hans Redeker, head of global foreign-exchange strategy at Morgan Stanley in London. “Volatility will be the name of the game, and the very first trading day of this year provides us with a taste of what to expect.”
The yen should also benefit in this environment, while currencies of commodity producers and emerging nations will weaken, said Redeker, whose bank was the eighth most-accurate forecaster of major foreign-exchange rates last quarter.
The turmoil is reflected in Group-of-10 currencies, where the average difference between one-month implied and historic volatility for options reached the most in one month on Jan. 4.
"An active 2015 has primed the markets for wide ranges in 2016, but 2015 has also likely preempted and dissipated some key macro sources of future volatility," said Alan Ruskin, Deutsche Bank’s global co-head of foreign-exchange research in New York.
The German lender is the second-biggest foreign exchange trader, according to Euromoney. While it sees a slight pullback in volatility this year, it expects markets to stay attuned to U.S. economic performance, Chinese currency depreciation pressures and declining commodity prices.
The latest turbulence was sparked by China, where a worse-than-forecast manufacturing report spurred an equity selloff that snowballed from Shanghai to New York.
“We’ve gotten a lot of calls about ‘Now, what do we do?,’” said Jason Leinwand, a New York-based managing director at Riverside Risk Advisors LLC, which advises clients on currency risk and hedging strategies. “Uncertainty in China is going to persist, at least through the beginning of the year. That doesn’t necessarily mean continued downside, but it does mean continued volatility.”