The foreign exchange market is becalmed. For all the noise and concern raised by the equity markets and the technology wobble, currencies are unmoved. The same was the case around the February 5 market correction, which left forex investors wondering what to make of the volatility elsewhere.
The euro-dollar cross is stuck in a range that has persisted since mid-January and the same can be said for dollar-yen trading in the past five weeks. In the past eight weeks, the S&P 500 gained 8 per cent and lost it.
Are forex investors blessed with wisdom or missing something?
This is no short-term currency lull. Kit Juckes at Société Générale reckons the forex market has been in this quiescent state since the start of 2017, in part because most currencies look fairly valued.
Two moments of activity have broken the inertia. In June, European Central Bank president Mario Draghi’s tapering talk gave a big boost to the euro and this January the dollar fell amid speculation of policy normalisation by the ECB and the Bank of Japan.
True, there have been some buying up of haven assets such as the yen and the Swiss franc as equity nerves make investors risk averse while trade tension is having some impact on the dollar bloc and emerging market currencies.
But monetary policy remains foremost in the minds of forex investors. Like the euro and the yen, the Canadian dollar, the British pound and the Scandinavian currencies have swung more significantly with the shifts of their countries’ policymakers.
Tim Graf at State Street said that, at a time of relatively stable inflation, economic data and global labour markets, central banks do not need to respond to “the whims of an equity market” that was running away with itself in January.
Mr Juckes added that “the bar has got be quite high to get us to worry about equities. The forex market is looking a long way ahead.”
So the time to worry is when an equity event becomes too big for currencies and central banks to ignore. But according to Neil Mellor at BNY Mellon, it would have to be of a scale far greater than the current difficulties.
“There is a lot of free cash desperately chasing yield,” he said. A trade war is unravelling before investors’ eyes but “the market doesn’t know what to do about it”.
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