Analysis: Whipsawed forex traders say currency moves ‘remarkable’, casino-like

Pound sterling and US dollar banknotes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White

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NEW YORK/LONDON, Sept 27 (Reuters) – Trading in the tumultuous forex markets is akin to being in a casino right now, according to some traders navigating markets that have been skewed as central banks and governments are trying to get their economies back on track.

Over the past week, sleep-deprived traders have been hard at work advising clients on extraordinary market movements: the collapse of the British pound to an all-time low, Japanese monetary intervention to support the fall of the yen and the deepening of the euro. dive below the dollar parity.

Above all, the mighty US dollar is trading at its highest level in two decades. Some see no end to the heartbreaking volatility.

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“It really is like a casino right now,” said John Doyle, vice president of trading and trading at Monex USA, who said he was more active in his discussions with customers and very cautious. as to risk.

“We’ve had to be extremely vigilant about our internal business policies to make sure we’re not taking undue risks,” Doyle said. “Discipline was the key.”

Deutsche Bank’s Currency Volatility Index – the historical volatility index of major G7 currencies – jumped to a two-and-a-half-year high of 13.55 on Monday.

Deutsche Bank’s currency volatility index hits two-and-a-half-year high

The British pound has fallen around 5% against the dollar over the past two sessions, its worst 2-session decline since March 2020, drawing comparisons with generally more volatile emerging market currencies.

The yen remains near a 24-year low against the greenback, despite Japanese monetary authorities intervening last week in foreign exchange markets to boost the battered currency for the first time since 1998.

While the pound and the yen fared very poorly against the dollar, the greenback’s meteoric rise did not spare any major currency. All G10 currencies have fallen against the dollar this year, with an average decline of around 16%.

“It’s been a hectic few days for sure, and sorely missed sleep,” said Michael Brown, head of market intelligence at payments firm Caxton in London. “I’ll blame the pound rather than my coffee habit for that, but going to bed at 11:30 a.m. and waking up around 3:30 a.m. to wire (the US-Sterling rate) hitting all-time highs was definitely not much fun.”

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The moves surprised currency traders and long-time investors.

Akshay Kamboj, co-chief investment officer at Crawford Ventures, a hedge fund that trades currencies, said while expecting a deep correction in sterling “this depth was not expected”.

“Our team is working around the clock from multiple global locations,” Kamboj said, adding that he was not trading in sterling as the direction of the pound is now entirely dependent on the reaction of the Bank of England.

VOLATILITY HERE TO STAY

The volatility is unlikely to stop.

“It feels like the fundamentals are still there for more messy moves,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets, who added that the driver would be dollar strength, which depends on the degree of warmongering of the American Federal Reserve. in the rate increase.

The US dollar has dominated on soaring US interest rates, a relatively strong US economy and demand for a safe haven as global financial markets have become more turbulent this year.

This has exacerbated problems around the world.

With the yen weighed down by the ever-widening gap between US and Japanese government debt yields, the euro hit by concerns over an energy crisis and its impact on the economy, and the pound slammed by fears that new government’s economic plan stretches With Britain’s finances stretched to the limit, dollar bulls were quick to press their advantage.

While FX traders are no stranger to volatility, the confluence of various risks makes this moment stand out.

Unlike March 2020, the last period of heightened volatility, when policymakers were united and had broadly similar responses to the pandemic, traders now face central banks reacting in their own way to soaring inflation and to the weakness of the currency.

“It used to be a macro story, but it’s really a central bank story with all rate hikes,” said Chris Huddleston, CEO of FXD Capital, a former currency and bond trader for 20 years. years.

Meanwhile, continued dollar strength bodes ill for global financial markets analysts at Morgan Stanley, a note said Monday.

“Such strength in the U.S. dollar has historically led to some sort of financial/economic crisis…If there was ever a time to be on the lookout for something to break, this would be it,” the analysts said. analysts.

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Reporting by Saqib Iqbal Ahmed, Carolina Mandl, John McCrank in New York and Dhara Ranasinghe in London, Writing by Megan Davies; Editing by Aurora Ellis

Our standards: The Thomson Reuters Trust Principles.

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