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Foreign-exchange volatility slows to seven year low

Rachel Evans

Central bank policies have restrained foreign-exchange volatility in several emerging and developed economies, including South Africa.

Foreign currency volatility in several countries across the globe has slowed. (Reuters)

Foreign-exchange volatility slowed to the lowest level in almost seven years as central-bank policies of monetary stimulus and forward guidance restrain price swings.

The yen strengthened earlier as a government report showed inflation accelerated to the fastest in more than two decades in April, reducing the prospect of additional stimulus by the Bank of Japan. The rand fell as South Africa’s trade deficit widened in April. Brazil’s real declined to a three-week low after a report showed economic growth slowed in the first quarter.

“The forward-guidance policy by the central banks is keeping a lid on rate expectations,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank in London. “We’re increasingly going to see very flat volatility. It doesn’t seem at present that there’s going to be any catalyst to shake us from the malaise.”

JPMorgan Chase’s volatility index for the currencies of the Group of Seven nations fell to 5.93% at 5.01pm New York time, reaching the lowest level since June 2007. A separate JPMorgan index measuring global foreign-exchange volatility also reached a 2007 low.

The yen was little changed at 101.77 per dollar, and is up 0.5% this month. The euro gained 0.2% to $1.36, paring its monthly decline to 1.7%. The shared currency added 0.2% to 138.74 yen, trimming its loss since April 30 to 2.1%.

Winners, losers 
The Chile’s peso gained 2.7% and the Russian ruble added 2.2% against the dollar this month, leading winners among 31 major currencies, according to data compiled by Bloomberg. The Swedish krona dropped 2.8%, while the Czech koruna slipped 1.8%, the biggest losers.

South Africa’s trade gap reached R13.03-billion ($1.2-billion) compared with a revised R11.9 billion-rand shortfall in March, the Pretoria-based South African Revenue Service said. The median estimate of 15 economists surveyed by Bloomberg was for a deficit of R11.3-billion.

The rand fell 1.5% to R10.57 per dollar, the biggest loss since February 19.

Brazil’s economy grew 0.2% in the first quarter, the equivalent to 0.8% on an annual basis, down from a revised 0.4% expansion in the last three months of 2013. Brazil’s currency has climbed 5.4% this year in the best performance among 24 developing countries, rallying partly on speculation President Dilma Rousseff will face a runoff following October’s first-round vote after overseeing stalled growth.

The real dropped 0.8% to 2.24 per dollar, reaching the lowest on a closing basis since May 5.

Canada dollar
Canada’s dollar dropped 0.1% to C$1.0846 against its US counterpart after a report showed economic growth slumped in the first quarter as a harsh winter in North America slowed housing construction, business spending and exports.

The euro declined versus 14 of its 16 major counterparts this month amid bets the European Central Bank will introduce additional stimulus measures, which tend to weaken a currency, to combat low inflation.

Hedge-fund managers and other large speculators added to bets the euro will weaken against the dollar to the most since July. The difference in the number of wagers on a decline in the common currency, compared with those on a rise—so-called net shorts—was R16 633 on May 27, compared with 9 220 a week earlier, according to data from the Commodity Futures Trading Commission.

ECB policy makers, led by President Mario Draghi, will reduce the refinancing rate to 0.1% on June 5, according to the median prediction of 53 economists surveyed by Bloomberg. Only two of the analysts predicted that the rate will stay at 0.25% Draghi said this month he’s “comfortable” with acting in June.

ECB watch
“We could see a large selloff in the euro if the ECB acts aggressively,” said Yuki Sakasai, a currency strategist in New York at Barclays. “A rate cut is already priced in and some people are also expecting liquidity measures, so the focus would be on whether they will deliver more.”

Japanese consumer prices excluding fresh food increased 3.2% from a year earlier, up from a 1.3% annual increase in March, the statistics bureau said in Tokyo on Monday. Economists surveyed by Bloomberg predicted an increase of 3.1%. Inflation quickened after the government of Prime Minister Shinzo Abe boosted the sales tax to 8% from 5% on April 1.

The BOJ is due to announce its next policy decision on June 13 after refraining from adding stimulus at its May 21 gathering.

“There are questions on what the BOJ is going to do, to them the current policies seem to be working and further easing might not be as imminent as we thought,” Sireen Harajli, a strategist at Mizuho Bank in New York, said in a phone interview. “The bias is for a stronger yen versus the dollar.”

Dollar trend The dollar erased losses against the yen after a report showed business activity in the Chicago area unexpectedly increased to a seven-month high in May. The Institute for Supply Management-Chicago’s business barometer rose to 65.5 this month from 63 in April. The median forecast of 46 economists in a Bloomberg survey projected the index would fall to 61. Readings greater than 50 signal growth.

“We did see a pop in dollar-yen in the last few minutes,” said Michael Woolfolk, a global-markets strategist at Bank of New York Mellon in New York. “The data this morning was favourable and in terms of the rise in dollar-yen we can make the argument that the positive data supported it.”  – Bloomberg

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