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Global Currency Wars Mean Currency Market Volatility is Here to Stay


News provided by

Saxo Capital Markets

12 Feb, 2013, 12:14 GMT

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Saxo Capital Markets Logo (PRNewsFoto/Saxo Capital Markets)

LONDON, February 12, 2013 /PRNewswire/ --

Volatility is back in foreign exchange and here to stay as a currency war emerges, says Saxo Capital Markets.

     (Logo: http://photos.prnewswire.com/prnh/20121115/574147 )

John Hardy, Head of FX Strategy at Saxo, comments:

"The investment community has had a 'eureka' moment, realising that in a world of fiat currencies backed by nothing in addition to weak demand, the winner is the country that devalues its currency by the most. With the advent of Japan's LDP government last December, the global currency wars were engaged. This is leading to investment opportunities in the foreign exchange market."

What happened to the FX market after the financial crisis?

After the spectacular moves of late 2008, currency market volatility slowly reverted to more normal ranges, with a few exceptions over the course of 2009-2011. In 2012, volatility dropped to such a low level that, towards the end of the year, trading ranges were back to levels unseen since the global credit bubble in 2006-07. In some cases, e.g. in GBPUSD and USDCAD, trading ranges were near or at their lowest in decades.

Many analysts have attributed the low volatility as the result of vanishing interest rate spreads, with the G10's highest yielder, the Australian dollar, featuring an overnight rate of a mere 3%. Even emerging market central banks have begun cutting rates to boost domestic economies. These central banks have taken away all systemic risks by providing endless liquidity.

Turning point

In mid-November 2012 came the announcement of Japan's forthcoming election, which quickly put the spotlight on the opposition LDP candidate and his firebrand rhetoric on forcing the JPY weaker, much of which was disguised as an effort to "beat deflation". Since then and since Abe's assumption of office, the JPY has moved a stunning 17% weaker against the US dollar and over 20% weaker versus the Euro in less than three months.

Comments Hardy:

"The fact that banks have taken advantage of the ECB backstop to pay back some of their emergency liquidity provisions early means that the Euro has soared dramatically this year. Meanwhile, sterling is sliding down at the prospect of the new BoE governor's arrival and the risk of a possible change of tack in monetary policy this summer. AUD and CAD are stirring as well, but this is only the beginning - there will be plenty more action to come in currencies this year.

"Japan has been the first mover with its overt promotion of currency policy to a matter of vital national interest. Understandable enough - but in a global economy, particularly one beset with weak demand and overcapacity, the move is also an act of international economic aggression that will have repercussions. The global currency war is engaged."

The key drivers of FX volatility risk

Saxo says that there are two key drivers of FX volatility risk at present. The first one is the politicisation of central banks, which has already appeared in Japan, but is soon to come to the West if Mark Carney implements radical new efforts to help the UK achieve "escape velocity" on his arrival at the Bank of England. Secondly, politicisation comes with the increasing recognition that central banks exercise the greatest degree of power over a nation's currency and economy, power that national governments would prefer to hold sway over themselves as the voting populations demand improvements and accountability from political leaders.

Comments John Hardy:

"The more specific driver in the near term for FX volatility will be the international response to Japan's dramatic recent move. Fasten your seatbelts and watch volatility and dramatic swings in the currency market rise from here. The market is in the process of making the uncomfortable transition from the former paradigm of merely bidding up all risk assets on the theory that central banks will forever provide a free ride, to the new paradigm driven by the implication of global currency wars as nation after nation moves aggressively to get the "upper" hand in the mud wrestling match of competitive devaluation. All currency values are likely to lose out in the long run, save for the one true currency - gold. But the back and forth along the way will be quite the spectacle."

For more information on currency wars and current FX topics, read the Saxo #FXdebates - Trading Insights from our Top Analysts e-book on http://uk.saxomarkets.com/fx-debates/currency-wars-ebook. On March 13, 2013 Saxo will host an event, in collaboration with Bloomberg LINK, focusing on the outlook for FX in 2013 and beyond. Follow the debates via twitter: https://twitter.com/SaxoMarketsUK; Hashtag: #FXdebates

About Saxo Capital Markets

Saxo Capital Markets UK Limited is a wholly owned subsidiary of Saxo Bank A/S, the parent company of the Saxo Bank Group, an international financial services group specialising in trading and investment across global financial markets. Saxo Bank has operated in the UK since March 2006, initially as a branch of Saxo Bank A/S and since 1 January, 2012 as Saxo Capital Markets UK Limited.

Saxo Capital Markets UK offers private investors online trading and investment in FX, CFDs, ETFs, Stocks, Futures, Options and other derivatives. Saxo Capital Markets UK also offers online trading services to a broad institutional client base including Hedge Funds, Introducing Brokers and Money Managers through our award-winning trading platform SaxoTrader, SaxoWebTrader and SaxoMobileTrader and Saxo's B2B/API services.

Additionally a large base of Banks, Brokers, Asset and Money managers, utilise our award winning white label solutions, in order to provide their clients with access to all or some of our trading platforms and associated liquidity.

Find out more about FX Trading opportunities with Saxo Capital Markets.

This material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. This material may refer to past performance and you should note that past performance is not necessarily a reliable indicator of future performance. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Saxo Capital Markets UK Limited or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

Saxo Capital Markets UK Limited is a company authorised and regulated by the Financial Services Authority, registration Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA

Media enquiries
Uriel Alvarado Cancino, Chief Public Relations and Marketing Officer, Saxo Capital Markets UK
+44-(0)207-151-2026
ukmedia@saxomarkets.com

Nicholle De Beer, Public Relations and Marketing Manager, Saxo Capital Markets UK
+44-(0)207-151-2024
ukmedia@saxomarkets.com

Smithfield
+44-(0)20-7360-4900
ukmedia@saxomarkets.com

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