His advice, which other professional currency traders and investors might be interested to read, is that “once you know how to do it, it’s not that hard”.
One has to wonder, really wonder, how they manage it. Because over at the wholesale end of things, the talk of the town is just how dead the market is –hardly a breeding ground for lucrative trading opportunities. The market is, in Commerzbank’s words, “structurally boring”.
How have currencies managed to elicit such a label from a German bank that is not exactly predisposed to excitement? Chief analyst Ulrich Leuchtmann noted earlier this month that his currency volatility index “has returned to the low levels which I referred to as ‘unsustainable’ in spring. Well that was wrong. ‘Nothing happening’ seems to be the new normal.”
This is an interesting point. Yes, we have been here before, as recently as March. Then, the three-month rolling trading range of the euro against the dollar was at its narrowest point ever, even taking into account old Deutschmark rates going back more than 35 years.
At the time, this was seen as a blip, a reflection of the US Federal Reserve’s decision to put interest rate rises on pause. Analysts also noted the market paralysis induced by the trade war between the US and China.
Now, implied volatility in the euro-dollar exchange rate – a measure of how likely market participants believe a shake-up to be – is at a new record low. “It can’t get more dead than that,” Commerzbank said on Tuesday.
It can get more dead, though. Bilal Hafeez, formerly a senior currencies analyst at Deutsche Bank and Nomura, who now runs analysis hub Macro Hive, points out that while expected volatility in the euro against the dollar is at an all-time low, actual volatility has been lower before, in the late 1970s.
For him, this means it would be unwise to expect a burst of excitement. Previous notable pick-ups in volatility have been driven by moments when major central banks embarked on different paths.
“Today, most central banks are on hold at low rates,” says Hafeez. Watch them for reasons to pounce, he says, but in the meantime, the experience of the 1970s shows that deeply sleepy market conditions can last for years.
The snooze-fest this (northern) spring may not have been a blip, then. Stability is sustainable after all. The trade talks are still grinding on with little chance of a swift resolution.
The global economy is sluggish, but not dramatically so. Major central banks are all singing the same tune, and the UK’s exit from the EU is tangled up in national politics. The trigger for a burst of activity is not obvious.
This is not necessarily a bad thing, of course. Boring predictability can be very useful for corporate treasurers, and the have-a-go retail traders gracing the tabloid pages still claim to be making a small fortune, somehow. Other fund managers, bank trading desks and market intermediaries, on the other hand, need some movement, any movement, to make a living.
“We empathise with those that subscribe to the idea of ‘secular stagnation’ in FX volatility,” wrote Bipan Rai, an analyst at Canadian bank CIBC. He adds another item to the list of factors depressing the market: the growing investor obsession with tracking benchmarks.
Buying dips in bonds and equities has become a reflexive habit, he says, suggesting there is less emphasis on trying to top up gains or avoid losses with currency bets.
But this should not give investors “carte blanche” to stop worrying about hedging their FX exposure, Mr Rai adds. For one thing, volatility tends to cluster, he says. Everything is quiet until it is not. Second, volatility tends to revert to the mean too.
By that analysis, complacency is dangerous. But believing that a burst of return-enhancing volatility is just around the corner can be career-limiting too. Pick your poison.
Financial Times
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November 27, 2019 at 08:58AM
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Stories of forex trading 'heroes' belie a quiet market - The Australian Financial Review
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