Lack of FX volatility leading to lethargy
VOLATILITY has been sorely lacking in the FX market of late. Many believe that concern over the FX fixing scandal is causing investors to sit on the sidelines awaiting a resolution which in turn has led to a dearth of liquidity in the market place. This causes rates to stand still and trade within very tight ranges.
This has led many corporate buyers to “sit, watch and wait” with regard to their deliverable hedging requirements. The corporate feeling seems to be that if a market moves against them, it will move back quickly. This has been true of the last few months but could be a very dangerous strategy as time goes on.
Importers will know that the pound has been extremely strong this year. The surge higher in GBP could be due to several factors; increasing expectations of a rate hike by the Bank of England, economic recovery being on a more balanced path since the appointment of the BoE Governor Carney, and inflation has fallen back to around the central bank’s target.
Arguably, this could continue and the market could push higher still. However, the current market make up shows that long positions in the Pound are at their highest since 2011. That might also suggest that the Pound is significantly over bought and therefore poised for a rapid and steep fall.
On the other hand, the US Federal Reserve is expecting to conclude its quantitative easing programme later this year which could lead to them making the first move on rates. However, the dovish sentiment coming from Federal Reserve Bank chair Janet Yellen would suggest otherwise.
The same uncertainty exists over Central Bank policy in Europe. Also, the Ukranian situation might bring a risk aversion move that drives safe haven flow to the Yen – or wil Abenomics continue to weaken the Yen to boost exports.
Ultimately, the lack of volatility has led to a lack of clear direction. With every day that goes by the likelihood of incoming investor flow increases. The result – a breakout is coming, one way or the other. When it does come, it will be profound and rapid.
So while it may seem safe to sit and wait it is important for corporate to ask themselves – “do current rates work for my budget levels”. If the answer is yes then why risk being caught out by a breakout that is inevitable.
Torrie Callander is a corporate dealer at Gllobal Reach Partners