From the April 2013 issue of Futures Magazine • Subscribe!

The new “new normal” in FX

Markets rule; really

The risk-on/risk-off trade and the perception, if not the reality, that governments and central banks were becoming too active in the markets have so rattled the markets that liquidity has suffered.

“Forex thrives on volatility, and not when everybody is running from the same side of the ship to the other,” says Wilkinson. “When they are rocking the boat in the same manner, it becomes difficult for everyone to make money. Now you are back to the situation where you are pitting your wits against everybody else.”

Not that Wilkinson agreed with the perception that governments were manipulating exchange rates, but he acknowledges that there had to be concern for the G-7 to commit to not doing it. On Feb. 12 the G-7 stated, “We reaffirm that our fiscal and monetary policies have been and will remain oriented toward meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates (see “Group of 7 make promise,” right).”

The announcement came a week ahead of the Moscow G-20 meetings. It was G-20 members that expressed concern over currency valuations, particularly with Japan. The G-20 made a similar commitment in Moscow. 

Wilkinson says, “The perception of a currency war is purely a figment of the market’s imagination and the beneficiaries are those that are speculating on the financial markets.”

And he is not alone in that opinion. “If you talk to people about currency wars, some say it is an actual conflict, others say it is a misnomer,” says Jim Conklin, director of research at QFS Asset Management. “It is natural for countries to ease monetary policy. Stop whining about the degree that G-4 has been pursuing financial [policy]. To some degree this has been strong monetary intervention. I don’t see G-4 countries changing policy. All are running near zero interest rates (plus QE). Everybody is pursuing their own interest through monetary policy; that is not a change from historical practice.” 

But he sees a definite distinction between loose monetary policy and currency manipulation. “With the exception of the Swiss and China, central banks are not expressly intervening in currency markets; they are conducting loose monetary policy. Some say it is the same as currency intervention, others say no, loose monetary policy is loose monetary policy,” Conklin adds. 

Wilkinson says, “[The G-20 commitment] helps assert confidence that the world’s largest nations are trying to restore domestic and global growth through prudent policies rather than through currency devaluation.”

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