Every time it looks like we are heading back to a “regular” market environment we are reminded just how extraordinary an event we went through in 2008. Perhaps there is no going back — at least not for a long time. The key factor is that nearly all major currencies are wallowing in a near zero-interest rate environment and central banks across the globe are keeping a tight handle on monetary policy (see “Not much to trade over,” below). The result has been historic low volatility in currency markets.
“Obviously with monetary policy and yield differential being a big catalyst for currency direction the whole world seems to have come to a standstill,” says Interactive Brokers Chief Market Strategist Andrew Wilkinson. “Risk was set in neutral gear and nobody has a good handle on what comes next for the dollar.”
Or for anything else for that matter. An odd component of the recent low volatility environment is that it is happening with the world awash in geopolitical risk. We have the Russia/Ukraine situation, a hot war in the Gaza strip, the Islamic State of Iraq and Syria (ISIS) gaining a strong foothold in both those countries and an Ebola outbreak in Africa.
“I have never seen anything like it in terms of complacency,” says Marek Chelkowski, principal of advisor MDC Trading. “There are a lot of volcanos.”
“We are setting records for most narrow average daily ranges,” adds Michael Aronovitz, portfolio manager for Gables Capital Management. “The average euro range is 30 to 40 pips a day; we were used to seeing 120 pips a day a few years ago. That is not going to change until interest rates begin to rise in the United States and there is more variation between (rates in) G10 countries.”
The situation compounds itself because with most central banks wallowing between zero and 50 basis points there is not a wide range of potential moves. “In a normal environment people would be looking at a larger potential range in movement of interest rates, but with it frozen that range is 25-50 basis points instead of perhaps 400 basis points,” Aronovitz adds.