Dollar surge raises hopes for volatile FX

Global Stock Markets

The U.S. dollar’s unexpected surge over the past month is encouraging currency traders to pray for a return of lucrative but long-dormant price volatility on the main foreign exchanges, although early signs on that are strangely subdued. 

Extra volatility - how much markets fluctuate up or down - opens up pricing gaps and anomalies that give traders more opportunities to make money, brokers more volume, and seeds greater demand for hedging services from multinational companies and cross-border investors.

But recent years have seen big currency swings evaporate as record-low interest rates converged towards zero and central bank money-printing weakened the cues exchange rates take from monetary policy trends and economic divergence.

That in turn has hammered profits at hedge funds and banks’ FX trading divisions, though some are asking whether the dollar’s blistering 5 percent rally since mid-April will mark a turn for vol, as known in market parlance.

So far there is little sign of this. Markets broadly look at two gauges of currency volatility — a daily swing in actual spot prices and an implied gauge derived from options markets on what traders expect volatility to be.

Three-month implied volatility EUR3MO= in the euro has completely unwound its February surge and is heading back below 6, levels not seen since 2014, while actual currency market swings remain comparatively elevated.

Realised moves in the euro remain elevated with daily volatility creeping up to around 5.5 and nearly doubling from the start of the year, a function of the dollar’s rally that has taken currency markets by surprise.

And there lies the rub. Despite the dollar’s rise, which has drawn comparisons with earlier cycles of a surging dollar and increased volatility in early 2015 and late 2016, traders remain sceptical this move signals the return to more volatile markets.

There are many in the market who say the recent dollar spike may be temporary, because it has been caused by speculators unwinding record bets against the greenback rather than a structural shift in the global economy.

What about volatility in other asset classes? U.S. Treasury bond volatility .MERMOVE is back towards record lows. In contrast, the S&P 500's .SPX volatility in the first 90 trading days of 2018 was the highest start to a year since 2009, while price swings of crude oil and metals are far higher than for the dollar.

FOREX-Dollar near 2-week high as U.S. bond yields edge up

Asian Stock Markets

* Rising U.S. bond yields help underpin the dollar
* U.S. 10-year bond yield hits highest since Jan. 2014
* Dollar index trades near Friday’s two-week high
* Against the yen, dollar touches 2-month high (Updates prices, adds comments)
By Masayuki Kitano 

 The dollar traded near a two-week high against a basket of major currencies on Monday, bolstered by rising U.S. bond yields, while easing concerns over global political risks weighed on the safe haven yen.

The dollar’s index against a basket of six major peers edged up 0.1 percent to 90.401, staying within sight of a two-week high of 90.477 set on Friday.

Rising U.S. bond yields helped underpin the greenback, with the U.S. 10-year Treasury yield touching a peak of 2.979 percent in Asian trade, the highest since January 2014.

Concerns that recent rises in global oil prices could add to inflationary pressures, as well as increases in U.S. debt issuance, are likely contributing to the rise in Treasury yields, said Teppei Ino, a Singapore-based analyst for MUFG Bank.

The dollar index has traded in a range of about 88.25 to 91.00 since around the middle of January.
The rise in U.S. bond yields pressured emerging Asian currencies, with the Indonesian rupiah hitting a two-year low of 13,895 per dollar.

Against the yen, the dollar hit a two-month high of 107.89 yen, and last changed hands at 107.80 yen, up 0.2 percent on the day.

Easing concerns over global political risks weighed on the Japanese currency, market participants said.

The yen tends to attract demand in times of economic uncertainty and market turmoil, and sell off when confidence returns.

North Korea said on Saturday it would immediately suspend nuclear and missile tests, scrap its nuclear test site and pursue economic growth and peace instead. It made these comments ahead of planned summits with South Korea and the United States

Even traders who had been bearish on the dollar seem to be looking for opportunities to take long positions, with the greenback seen underpinned for now by higher U.S. bond yields.

The euro eased 0.1 percent to $1.2274, having set a two-week low of $1.2250 on Friday.

The common currency had slipped last week as investors trimmed long positions in the euro ahead of this week’s European Central Bank policy meeting at which policymakers are largely expected to signal no change in policy.

Sterling last changed hands at $1.4016, up 0.1 percent on the day. Last week, it fell 1.7 percent, its biggest weekly drop since early February.

The pound fell last week on weaker-than-expected inflation and retail sales data and comments from Bank of England (BOE) Governor Mark Carney on Thursday, which traders interpreted as the BOE being less committed to raising rates in May due to recent “mixed” data.

Market Update - Part I

FM Wealth Management News Letter

Unlike what you have been led to believe there is no big secret to how the markets work. In reality, it is really quite simple. Unfortunately that does not mean that specific smaller degree moves in the market will be just as simple.

Markets act the same wherever you look. Whether it is the equities, metals, Forex, crypto-currencies, etc, they all react in the exact same way. Markets simply move from one extreme to another.  We need to be able to identify where those extremes can cause a turn.

So therefore in making your determination of turning points, there is no one definitive point at which a market must turn. So really we are dealing in probabilities when we attempt to analyze that which is non-linear in nature, such as the financial markets.

For Clients and Newsletter readers that have followed FM Wealth Management and FM Wealth Management reports for years, would know that this is exactly how we apply our wave analysis.


As an example, we were able to identify major shift changes in the US Dollar Index (DXY) when we called for a multi-year rally in 2011 when DXY was at the 74, with a long-term target to 103.50.

Another example was when we came within $6 of the top in the gold market in 2011. For those who recall, our initial expectation was that gold would see a 40% pullback before gold even struck its high.

At that point we pointed out that if that 40% drop would not hold support, it could open the door for gold to correct all the way back down to the $1,000.

 Many analysts and clients disregarded our analysis at the time because everyone was so certain it would easily eclipse the $2,000 region during the parabolic phase it was in at the time we made this call. So, when gold gave us a 40% correction from our top call, we began looking for a resurrection of the bull market.

However when the market made it clear that it was not going to resurrect, we began looking for the price to come down to $1,000-1100 before looking for another bottoming structure.

So we remain flexible, as we do not believe that anything MUST happen within the financial markets.

Report on China slowing US bond purchases may be 'fake,' regulator says

Asian Stock Markets

A report that China is considering slowing or halting purchases of U.S. Treasury bonds may be based on erroneous information and could be "fake," the country's foreign exchange regulator said on Thursday.

 
Bloomberg News reported on Wednesday that Chinese officials reviewing the country's vast foreign exchange holdings had recommended slowing or halting purchases of U.S.

Treasury bonds amid a less attractive market for them and rising U.S.-China trade tensions. The report sent U.S. Treasury yields to 10-month highs and sent the dollar lower.

"The news could quote the wrong source of information, or may be fake news," the State Administration of Foreign Exchange (SAFE) said in a statement published on its website.

The U.S. 10-year Treasury yield edged down to 2.5366 percent from Wednesday's close of 2.549 percent, while the dollar gained 0.3 percent to 111.72 yen after the regulator's comment.

China has been diversifying its foreign currency reserves investments to help "safeguard the overall safety of foreign exchange assets and preserve and increase their value", the SAFE said.

The forex reserves investment in U.S. Treasury bonds is a market activity, with investment professionally managed according to market conditions and investment needs, it said.

The regulator added that forex reserves management agencies are responsible investors in
international financial markets.

The exact composition of China's reserves is a state secret and the subject of intense scrutiny by global investors.

According to data from the Treasury Department, the country is the biggest foreign holder of U.S. government debt, with $1.19 trillion in Treasuries as of October 2017.

China's foreign exchange reserves, the world's largest, rose $20.2 billion in December to $3.14 trillion, as tight regulations and a strong yuan continued to discourage capital outflows, data from China's central bank showed.