Skip to main content

Central Banks: Both Killers and Causes of FX Volatility

07:00 December 2nd 2016 in Media, Videos

Central Banks: Both Killers and Causes of FX Volatility

Bob Savage, CEO of CCTrack Solutions, talks to Profit & Loss deputy editor, Galen Stops, about why geopolitical unrest this year hasn’t translated into more FX volatility.

This year has been marked by a high degree of geopolitical unrest and uncertainty, with Britain voting to leave the European Union, Italian banks struggling ahead of an important referendum later this year, questions being raised about the future of Europe and a divisive US presidential election. 

Meanwhile the war in Syria continues, ISIS has not been defeated, Russia is considered to be actively attempting to expand its sphere of influence and there is the suggestion that some long-time US allies in Asia – such as the Philippines – could drift closer in their relations to China in the coming years.

Yet despite all this unrest and uncertainty FX volatility has remained fairly low in 2016, with the exception of one or two sharp, but ultimately short-lived, spikes.

Savage argues that one reason for this is simply that asset flows are significantly lower in such an uncertain environment, citing August as a perfect example of this.

“The American’s became French, we were all on vacation, there was no reason to move the needle at all,” he says. “There was volatility, however, of great consequence and it was derived from the same people that have been killing it, the central bankers are the reason why we’re in this environment where FX, bonds and in many ways equities are living in the “TINA” world: There Is No Alternative.”

Savage comments that trading firms need to find yield, and in doing so they are currently buying equities for the dividend yield and bonds for the capital appreciation, which he describes as “the world turned upside down”.

He says that this is a deliberate part of central banks policies, but highlights another way that central banks are impacting markets, pointing to comments made by William Dudley, president and CEO of the New York Federal Reserve Bank, on August 15 this year, when he stated that the market was underappreciating the risk of a September rate hike.

“Now we all know that they didn’t do it but they [the Fed] were clearly moving to another level of manipulation,” says Savage.

Indeed, he adds that central bank policies are likely to have a bigger impact on financial markets than any geopolitical event on the horizon.

“We know in the current game of trading that politics always trumps economics, but the bubble will pop because central banks will run out of easing. When that happens then policy will trump politics,” predicts Savage.

Discussing which geopolitical risks the financial markets might be flying under the radar right now, Savage expressed concerns about events in China.

“The eight hundred pound gorilla in the world that no one quite understands or believes is China, and the October leadership change next year will be significant and the events leading up to that are much more likely to dominate emerging markets and the way that developed markets trade.

“China is the second largest economy in the world and its economy demand and it role in trade in Europe and the US and Japan and all of Asia is so important and yet we want to believe that it’s booming or that it’s on the back burner so that no news is good news, I’m more inclined to believe that no news is bad news. If you don’t hear form China on a regular basis as to where they’re going, that means they don’t know themselves,” he says.

Watch the full interview here: