Currency Markets Jolted After Months of Calm
Volatility Rises as Investors Focus on Interest-Rate Divergence
By ANJANI TRIVEDI and IRA IOSEBASHVILI WSJ
After months of calm, currency markets have sprung back to life, as investors scramble to take advantage of the divergent paths taken by major central banks.
Bigger and more-frequent shifts in the foreign-exchange market are a welcome relief for investors, many of whom struggled to make profitable trades when currencies weren’t moving as dramatically.
Banks, whose currency desks execute trades on behalf of clients and companies, also see revenues grow when choppier markets drive up demand for their services.
“This definitely brightens my day,” said Chris Stanton, who oversees about $200 million at California-based Sunrise Capital Partners LLC. “It’s a welcome return to what feels like a freer market.”
- U.K. Pound Hits 10-Month Low on Scotland Fears
- Emerging-Market Currencies Slide
- Swiss Franc Falls vs. Euro
The size of daily trading swings across currencies has jumped 55% since hitting its lowest in at least a decade on July 31, according to Deutsche Bank AG. During that time, the dollar climbed to a six-year high against the yen, the euro fell below $1.30 for the first time since July 2013 and the pound tumbled to a 10-month low against the dollar. On Wednesday, the Swiss franc saw its biggest drop against the euro in six months.
Driving the price swings is a shift in policies at some of the world’s largest central banks. A burgeoning recovery in the U.S. has brought the Federal Reserve closer to raising rates, a move that would make the dollar more attractive to investors. At the same time, European and Japanese central banks are still trying to kickstart their economies and relying on policies such as bond buying that tend to drive down interest rates and reduce the value of a currency.
Implied volatility, which tracks the price of options used to protect against swings in exchange rates, has surged 45% in September to an eight-month high, according to Deutsche Bank. Higher implied volatility suggests money managers are buying options in anticipation of a more-active market.
Some money managers are buying the dollar ahead of next week’s Fed meeting, where policy makers could send firmer signals on their outlook for interest rates. Mr. Stanton’s fund is betting that the dollar will continue to strengthen against the yen and emerging-market currencies as the Fed gets closer to raising interest rates.
Citigroup Inc., C +1.11% the world’s largest currencies-dealing bank, on Monday said its markets revenue, which includes currency trading, is on track to be roughly flat in the third quarter compared with the same period in 2013, ending a decline that started a year ago.
Until recently, unusually calm markets had left investors with fewer opportunities to trade and led to the demise of several large currency funds. FX Concepts LLC, founded in 1981 and considered a pioneer in currency investing, closed its doors last year after assets shriveled to $660 million from $14 billion before the financial crisis.
Currency volatility plummeted after the financial crisis, as the world’s biggest central banks cut interest rates to near zero. That gave traders little incentive to try and capture the difference in interest rates between various currencies, a key driver of activity in the foreign-exchange market.
That status quo has started to crack. Minutes from the Fed’s July meeting showed growing support for raising rates, spurring gains in the dollar when they were released in August. Earlier this month, the ECB surprised investors with a rate cut, bringing down the euro. Meantime, the pound tumbled on concerns over the repercussions from Scotland’s possible secession. On Wednesday, the Swiss National Bank said that it could introduce negative interest rates to halt the franc’s rise.
Trading bands of some major currencies have widened this summer, opening the door to bigger profits for investors. So far in September, the dollar is moving on average by 0.70 yen a day, the biggest range since February and up from 0.35 in July. Daily moves in the euro this month are averaging 0.79 U.S. cent, compared with 0.4 cent in July.
“Now, there are more opportunities to make money,” said Masafumi Takada, vice president of currency trading at BNP Paribas SA BNP.FR -0.39% in New York. Business volume at the bank’s New York currency-trading desk has quadrupled since July, Mr. Takada said.
Currency volatility can be a double-edged sword. Investors can profit by riding the dollar’s steady move higher against a variety of currencies. But a sudden reversal—such as a surge in the pound if Scotland votes against independence—could catch traders off guard. Goldman Sachs Group Inc. GS +1.39% took a loss on an options trade involving the dollar and yen about a year ago, people familiar with the matter said. Last summer, the yen’s months-long decline had stalled.
Federal Reserve Chairwoman Janet Yellen attends a Board of Governors meeting at the Federal Reserve in Washington last week. Associated Press
Some traders believe the current bout of volatility may die down. The large moves seen this week are unusual, analysts say.
On Wednesday, the euro fell 0.2% to $1.2917, while the dollar rose 0.6% against the yen to 106.85. The pound rebounded, with the dollar falling 0.64% against the British currency.
Still, many find it hard to imagine that the magnitude of the Fed’s policy shift won’t continue sending waves across currency markets.
“The dollar’s on a tear, and there is more of this to come,” said Kit Juckes, a strategist at Société Générale SA.
—Justin Baer and Saabira Chaudhuri contributed to this article.
London and New York, NY – Markit, a leading, global financial information services company, today announced the launch of an open messaging network that will enable people in all parts of the global financial services industry to communicate and share information seamlessly.
To date, communication between market participants has been hampered by the lack of system interoperability.The new network removes barriers to industry communication by allowing messaging platforms, critical to price discovery and pre and post trade operations, to connect to each other.
Markit Collaboration Services allows users to see availability, send instant messages, use video and chat rooms, and exchange documents across disparate messaging platforms.Federating messaging platforms makes it cost effective for institutions to offer the benefits of a cross-industry collaboration network to employees throughout their enterprise.The federation service is powered by NextPlane, the market leader in cloud-based unified communications (UC) federation services for collaborative business communities.
The new network also provides the first open directory for the financial services industry, enabling people to find, communicate and collaborate with one another.The messaging and directory services can be embedded in third party applications, workflows and other networks, extending the functionality of trading, processing, research and other applications.
Thomson Reuters is a founding member of the network and will federate its instant messaging tool, Thomson Reuters Eikon Messenger, with the network. Thomson Reuters Eikon Messenger was built using open-based standards to offer a secure, federated messaging system that facilitates collaboration across the financial markets.It already connects to other
messaging platforms such as AOL and Yahoo!. It has a community of over 200,000 financial professionals from more than 170 countries that will be able to communicate across the new network.
BofA Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase and Morgan Stanley have also joined the network and will use the federation and directory services at the enterprise level. These firms employ more than one million people worldwide, all of whom are eligible to use the new network.They will also invite their customers to join the network.
Lance Uggla, chief executive officer of Markit, said: “We’re excited to launch this new collaboration network which is the first of its kind.Our aim is to help financial market participants become more efficient in the way they communicate and share information. By offering them an interoperable collaboration system, we will change how financial markets operate.Having
Thomson Reuters and many of the industry’s major players as part of the network underlines the value of our proposition.”
David Craig, president of Financial & Risk at Thomson Reuters, said: “Thomson Reuters was an innovator in open messaging, launching one of the first instant messaging services specifically designed for financial markets 11 years ago. We are excited to work with Markit and the industry as a founding member of this new open messaging initiative which aims to break down the last barriers to cross-industry communication. This will significantly help the industry and will enable our customers to connect to their clients and counterparties regardless of the messaging tools they are using.”
Perry Vais, cohead of quantitative strategy at BlueMountain Capital Management, said: “We envision using the new network to connect easily with trading desks, prime brokers, research departments and others in the market.With a single point of access to multiple messaging systems, the network helps us work with anyone and minimises the technology required.”
Zar Amrolia, cohead of Fixed Income & Currencies at Deutsche Bank, said: “Deutsche Bank is at the forefront of emerging technologies that drive market efficiencies. This new network allows us to connect disparate systems and improve the quality of communication and therefore service we provide to clients. We welcome any initiative that improves access and communication across markets and with our clients. The service will refine our back office technology footprint, whilst bringing efficiencies to our client facing franchise across the bank.”
Steve Grob, director of group strategy at Fidessa, said: “The use of intelligent messaging within trading applications is a definite direction of travel for the industry. Markit’s initiative means that we can work with those of our customers that are also on Markit’s new network to build intelligent workflow messaging across our buy and sellside trading community.”
Jim Toffey, head of E-Markets at GFI Group, said: “We work with dozens of dealers and today we rely on multiple systems to communicate.The ability to use one platform to reach many customers is extremely valuable.We also need to verify that we are working with authorised representatives at our customers and having access to a single, global directory that is validated by firms on the network is a major advance for our business.”
Heidi Johnson, managing director and head of Collaboration Services at Markit, said: “All participants in the financial markets are invited to join this open network.We believe our technology will transform the way people communicate, access information and connect systems and people.Having a technology-agnostic network will open up exciting new ways to connect systems and people.”
About the network
Markit Collaboration Services is open to any participant in the financial industry, and thousands of buyside firms, banks, exchanges, interdealer brokers and vendors are expected to join the network.
The ability to federate enables firms on the network to optimise the investments they have made in messaging and compliance infrastructure.Federation supports all XMPP and SIP-based
messaging, including Thomson Reuters Eikon Messenger, Microsoft Lync and Cisco Jabber.
Farzin Shahidi, founder and chief executive officer of NextPlane, said: “We believe that organisations should be able to communicate and collaborate seamlessly
with one another in realtime, regardless of their underlying unified communications and messaging platforms. We are pleased to provide the scalable, many-to-many UC federation service which allows the financial services industry to collaborate in realtime.”
The network includes a security and privacy framework that provides participating firms with full ownership of their messaging.Message content is encrypted and is not stored by the network.
The network is supported by the Vantage governance platform by Actiance, the gold standard for active compliance which ensures all interaction on the network adheres to member company policies and FINRA standards.
Steve White, product manager at Actiance, said: “Social tools and industry-focused networks clearly help drive innovation and productivity across broad and often geographically dispersed user groups.We believe the open standard approach taken by Markit, coupled with the necessary compliance capabilities provided through Vantage, will be well received in the financial services industry.”
For more information, please visit:www.markit.com/Product/collaboration-services
For More Information, Please Contact
Tel: +1 212 205 7101
August 7, 2013, 1:28 PM ET
Companies Shift Cash Out of Treasurys as Fears Subside
Companies moved money out of government debt and into commercial paper and corporate debt, as worries over Federal Reserve policy faded and treasurers showed a willingness to take on some risk to gain yield.
Click on the image above to view an interactive chart of corporate cash allocations.
U.S. Treasurys ended a three-month streak of increases in their share of corporate cash allocations, falling by 0.85 percentage point to represent 26.5% of corporate cash on August 1, according to data from Clearwater Analytics.
Corporate debt and commercial paper grew by .55 and .32 percentage point, respectively. Corporate debt remains the largest asset class among cash allocations, representing one-third of the total.
Worries that the Fed would reduce its bond-buying program prompted credit spreads to widen in May and June, said Rhet Hulbert, a portfolio manager at Clearwater Advisors LLC. But last month, he said, “the market settled, recognizing an over-reaction.”
Mortage-backed securities grew by .21 percentage point to 3.5% of all cash allocations.
“Mortgages had been underperforming other asset classes recently,” Mr. Hulbert said, “but investors in July moderated their views on risk and interest rates and moved some assets back into the space.”
Other asset types were mostly stable last month. Both agency bonds and CDs sank by 0.16 percentage point, but all other asset classes shifted less than 0.1 percentage point in July.