LONDON Feb 8 Sudden swings in currency rates
are refiring measures of future global markets volatility,
pushing these risk gauges back towards what some will see as
more realistic and even healthier levels.
Many blame fresh talk of "currency wars" between the world's
major trading blocs, which have been implicitly or explicitly
depressing currency rates for trade and export gains to give
themselves an edge in a growth-starved world.
Japan's decision last year to actively weaken the yen was
its latest shot, but years of Chinese intervention to cap the
yuan and U.S. and British money-printing to offset their
financial crises have had similar effects.
A recent surge in the euro, partly reflecting the European
Central Bank's refusal to engage in open-ended monetary stimulus
despite regional recessions, got a testy response from ECB chief
Mario Draghi this week, while French President Francois Hollande
made an outright call for euro targets.
Next Friday's meeting of G20 finance chiefs in Moscow will
bring developments into even sharper focus.
The effect has been gyrations in currencies that have been
dormant for years, prompting some asset managers to reassess
relative returns between regions, exporter earnings expectations
and the future path of interest rates.
Others are locking into still historically cheap options -
priced with reference to volatility itself - to hedge against a
bumpier ride for the broadly bullish portfolios assembled over
"Investors are increasingly worried that government
intervention in currency markets will be a feature of the
investment landscape moving forward," Bank of America Merrill
Lynch chief investment strategist Michael Harnett told clients.
"At the very least, currency markets have become the new
'automatic stabilizer' for growth."
Measures taken last year to stabilise fractious debt markets
in Europe and elsewhere had the effect of suppressing asset
volatility around the world. But could a shift of policy focus
to currencies disturb that?
"This year people will look less at bond yields and
peripheral spreads and more at currency moves," said Morgan
Stanley equity strategist Graham Secker.
The shake-up may not be all bad. By sobering up markets
after January's heady and probably unsustainable surge in global
stocks, firmer volatility gauges may better represent the
still-fragile global economy and check the excessive inflows now
creating their own risks.
"A correction playing out now probably prevents a nastier
bout of weakness later, so remain firmly in a 'buy the dip'
mindset for stocks," BoAMerrill Lynch said.
The drop in future or implied market volatility gauges to
multi-year lows in 2012 puzzled many, given the proliferation of
risks - sputtering Chinese growth, a U.S. election and 'fiscal
cliff' standoff, and the still-simmering euro zone crisis.
Wall's Street's short-term measure of implied one-month
volatility on the S&P500 index, the so-called
'fear-index', and its European equity equivalents
plumbed depths not seen since before the 2007/08 credit crisis
Equivalent seismographs for currency markets did likewise,
with implied volatility in the pivotal Transatlantic euro/dollar
exchange rate falling to five-year lows.
The reasoning was that floods of new cash from the big
central banks smothered trading and hedging activity by putting
an effective floor under financial asset prices, tempering the
risk of new economic shocks. Faith in government and central
bank policy action swamped all other metrics.
And actual volatility reflected that. Fund manager Vanguard
has shown that of the 274 trading days last year, only seven saw
U.S. equity indices prices move more than 2 percent, with drops
of more than 2 percent seen on only three occasions.
The result was to tempt relatively conservative investors
back into higher-risk markets, and 2012 ended with full-year
gains in virtually all asset classes - developed and emerging
equities, government and corporate bonds, and real estate.
But as investment flows have returned, some of the worst
systemic fears have ebbed, and more idiosyncratic national and
stock valuations have come back to the fore, volatility seems to
have troughed and may now bubble back to more "normal" levels.
Currency restlessness and new policy twists around it may
reinforce that, or act as a catalyst. The VIX has already risen
from around 12.5 percent in mid-January to nearly 14 percent,
although it remains five-year lows and well below its 200-day
moving average of about 17 percent.
Euro stocks equivalents have jumped from about 13 percent to
more than 17 percent over the same period, although they too
remain below long-term moving averages of just above 20 percent.
Implied three-month volatility in euro/dollar currency rates has
meanwhile risen more than a point to about 8.5 percent.
There is no doubt that implied volatility remains low across
the board, with even the 200-day moving average of the VIX
having dropped almost 10 percentage points over the past year.
But the picture painted at the start of the year now seems
"So what can investors expect? Without a crystal ball, no
one truly knows," wrote Vanguard strategist Fran Kiniry.
But "one thing we do know is that periods of low volatility
(like periods of high volatility) do not last."