2015 provided more than its fair share of drama in the currency markets. As we head into 2016 this looks likely to remain a dominant theme.
2015 provided more than its fair share of drama in the currency markets. From the astonishing move seen in the CHF in January as the SNB abandoned its ceiling against the EUR through to the near exit of Greece from the Euro-area in July, fears of a CNY devaluation in August and on to the renewed weakness seen in the EUR ahead of critical monetary policy meetings in December, the strength of the trends and the rise in volatility stood in sharp contrast to that seen through 2012, 2013 and the first half of 2014. However, if there was one unifying theme it was that in an environment where negative interest rates no longer raise eyebrows, monetary policy (and, by definition, currency policy) has become the overriding driver of the FX markets.
This point is driven home by contrasting the volatility seen in the aftermath of a scheduled press conference by Fed Chair Janet Yellen in March during which she tweaked investors expectations on when the FOMC would begin to hike rates with that seen in the aftermath of the downing of a Russian jet on the Syrian border just a few weeks ago. For a modest shift in monetary policy expectations to lead to the 5th highest reading in overnight volatility in the USD index since the Plaza Accord while the downing of a Russian jet by a NATO member (the first time this has happened since the cold war) caused barely a ripple is a clear indication of how investors are being forced into a search for yield. As we head into 2016 this looks likely to remain a dominant theme.
“If … monetary policy remains central to the performance of the currency and underlying asset markets in 2016 … it seems reasonable to assume that investors will continue to reach for yield for the foreseeable future. ”BNY Mellon Markets Strategy Team
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