From the beginning of the year volatility in the FX market has been low. This is despite the fact that the global equities have been rising to new record highs amid hopes for broader global economic recovery. Investors in the Middle East, working around the lack of volatility have acted in two ways – they have been very selective in their trading pairs and have moved into other products such as CFDs. A clear example has been in the trading of cable, with the region following the bull movement which has added 2.65% since January. Added to this picture commodities, especially gold and silver which are much favoured investments in the region, have been the worst performing assets.
The recent central bank decisions are beginning to increase investor’s concerns about the economic outlook.
The negative effect of the sales tax hike in Japan has been worse than expected, which has opened the door for revising measures by the government and/or further measures by the Bank of Japan. The ECB’s aggressive intervention including cutting the three major rates (refinancing rate, minimum bid rate and negative deposit rate) and announcing QE and targeted LTRO sent a message to traders that the situation is very bad in Europe. It also showed that the ECB is reluctant to deal with the disinflation risk. Also, in the US, recent economic releases after the winter season came in with disappointing figures which raised more questions about whether the Fed’s policies are really dealing with the slowdown. All of those factors convinced Middle East traders that they need to switch from commodities and FX to structured products and/ or equities. Everyone is chasing better yields!
Meanwhile, Ramadan and the World Cup are ahead of us. If we look at volatility levels during this period in the past and especially in Ramadan, we can see that the average stock market returns in predominantly Muslim countries are almost nine times higher during Ramadan compared to other months of the year. However, the World Cup’s historical data shows that volatility and liquidity usually slump.
If we are not careful the FX markets might almost stall during the World Cup. The only event that may lead to a significant move would be a surprising decision from any of the central banks and/or accelerating geopolitical tensions, either in Ukraine or between Russia and the west. Otherwise, volatility is likely to remain lower until the end of the FIFA World Cup this summer.
If we are to expect any surprises in the next few weeks, it is likely to come in either from the Federal Reserve or from the Bank of Japan. If the US economy continues to deteriorate against the Fed and the markets’ expectations, the Fed may have to pause QE tapering which could lead the markets into a panic phase. Japan faces the same scenario; further negative effects from the sales tax hike might lead the government and the bank of Japan to intervene either by other stimulus measures or by revising previous sales tax hike decisions.
No one likes a 0-0 draw but that is what we are faced with at the moment!