Currency Investors Find Central-Bank Policy Road Map in Tatters

  • Euro, yen have rallied even amid extra central-bank easing
  • Traders see cloudy rate-gap signals, Credit Agricole says

It’s getting harder for currency traders to profit from divergent global monetary policies.

While the euro and the yen posted their first weekly slumps since March, these currencies have shrugged off additional stimulus from policy makers in Europe and Japan this year and rallied. The euro has climbed 3.4 percent during the past three months even as projections for European interest rates have moved lower before the European Central Bank meets April 21.

Using interest-rate differentials to predict currency moves has lost its mojo, as unprecedented accommodation by central banks around the world erodes the link between the outlook for a nation’s monetary policy and its exchange rate. While comparing interest rates to determine currency shifts isn’t devoid of value, traders are increasingly focused on other factors, such as exchange-rate correlations with stocks or oil, and political risk. 

“The problem for many central banks is that the market is assuming that, to some extent, they have reached their limit and have run out ammunition,” said Manuel Oliveri, a currency strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “Markets do not fully understand or perceive well the most recent policy steps by central banks.”

The euro touched a six-month high before ending the week down 1 percent at $1.1284. The yen slumped 0.6 percent to 108.76 per dollar, after hitting its strongest since October 2014.

Policy Effect

Currency-focused hedge funds are on pace to post declines for a second straight month, having lost the most in in March in at least a decade, according to a BarclayHedge gauge. The measure, based on the returns of 10 funds, has fallen 0.3 percent in April, extending last month’s 3.8 percent decline.

ECB President Mario Draghi dropped interest rates to a record low and expanded the central bank’s bond-buying program in March, two months after the Bank of Japan’s Haruhiko Kuroda moved the nation’s policy rate below zero. In the U.S., policy makers have stuck with plans to raise rates this year, albeit at a more gradual pace.

While European officials meet next week, U.S. and Japanese central bankers won’t be far behind, convening on April 27 and 28, respectively.

“We’re seeing less of an emphasis on central bank policy for euro-dollar,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc. “Both of those central banks have stepped back from that divergent policy that was driving a lot of the gains in the dollar.”

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