LONDON, June 13 In the struggle to explain this year's collapse in volatility and volume in financial trading, one newly-nominated culprit is central banks' intent to use every tactic available short of raising interest rates too soon.
It sounded like a deeply contrarian view on Friday after comments by Bank of England Governor Mark Carney, but a study by analysts from market heavyweights HSBC this week argued that the use of macroprudential steps will make central bank interest rates in general less volatile in future. Implicitly that may mean markets see less marked swings.
The global economy is right at the point, as the economic fates of Japan, Europe and the United States diverge, when an upturn in trading action could be expected due to the growing chances for arbitrage between future interest rates.
Yet volatility, which traders depend upon for profits, is at rock bottom. Trading in currencies on the biggest platforms has fallen by a third to half in the past year; options contracts betting on volatility are around all-time lows.
Even with a blip higher stemming from Carney's comments on Friday, sterling implied volatility was glued to its lowest levels on record, less than a quarter of highs reached in 2008.
There are numerous theories as to why, ranging from the growth in machine-driven trading to the scaling back of banks' mandates to invest on their own account, disappointment at the pace of the U.S. recovery or allegations of market manipulation that have pushed traders back inside their shells.
The HSBC study argues that one big factor may be that central banks are in the midst of a regime change of their own.
"Macroprudential policy, which aims to maintain financial stability through targeted measures, is already part of the mix and is set to grow ever more important," HSBC analysts said in the paper this week.
"It will, in part, replace interest rate moves and since FX has traditionally been very sensitive to rates, the repercussions for the currency markets will be significant."
Thereafter, it all gets a bit cloudy.
New Zealand, Canada and Norway have all used targeted measures to tighten their grip on mortgage lending and take some of the heat out of their property markets but in the end wound up raising borrowing costs anyway.
Indeed the New Zealand central bank delivered another market shock this week in pledging it still has a lot more to do.
Likewise, while UK finance minister George Osborne promised further steps to target house prices in a speech on Thursday, Carney followed less than an hour later with a U-turn on policy that looked very like a promise of higher borrowing costs this year.
This all goes to the traditional thinking of many market players on macroprudential policy: it is very nice in theory but has never worked except as a distraction before we return to the real business of managing demand through interest rates.
Yet it is not just HSBC who says that view is outdated.
"What you have to recognise about macroprudential measures is that they are a response to the failure of inflation-targeting, which does not work and is too blunt an instrument," said Neil Mellor, a currency market strategist with U.S custodial lender Bank of New York-Mellon in London.
"You can certainly point to the failure of measures in the past, but if for example we can even partially enhance economic stability over the course of the cycle then that will be a good thing. I think we will see a lot of tinkering over the next few years."
As with so much of policymaking since the 2008 crisis, this all stems substantially from the need to find ways to do more to address the imbalances and risks in the detail of economies that interest rates can just wash over.
Much of the HSBC study concerns itself with trying to establish the likely impact of the longer-term and more consistent use of macroprudential measures.
But, as ever, there are imperatives for officials like Carney in what is right in front of his nose: keeping the British economy going as fast as he can without the wheels coming off either the banking system or inflation.
Notwithstanding Thursday's words, if he can find any way to accomplish that without having to deliver on the threat of higher rates then surely he will.
"As a central banker you have to look at the overall picture of the economy," says Andrew Wilson, CEO of Goldman Sachs Asset Management in London.
"I am not sure it will reduce volatility but if macroprudential policy dampens, for example, house price inflation then it may mean monetary policy needs to do less to weaken demand in the economy in general." (Editing by Ruth Pitchford)