A big week is being predicted in the world of foreign exchange trading as a full-blown ‘currency war’ zooms into sight.
Volumes in the foreign exchange markets have sprung back to life since the start of the year as the world’s major currencies have veered from their tight trading ranges of 2012.
All of this is good news for many FX traders as the dislodgment in exchange rates means that more market participants are forced to enter and exit the market in a bid to hedge or cover rapidly changing positions, thus increasing volatility. Traders are also re-entering the FX markets to gain a fast buck in predicting the movements of currencies.
FX traders generally need movements in the market to make money due to a lack of natural income flow.
EBS, the Icap-owned FX trading platform, which handles flow from the biggest banks, announced last week that its daily average currency trading volumes for January had rebounded 22% on the year and by 54% on the month. Banks such as Citigroup, Barclays and Deutsche Bank have also reported big surges in forex volumes for January.
“The fact that FX volume has accelerated is also a sign that volatility is likely to remain higher than in 2012,” said Greg Anderson, head of the North American Group of 10 currency strategy at Citigroup in a recent note to clients.
Many experts believe the catalyst for this was the move by Japan last month, the world’s third largest economy, to make clear its intentions to devalue its currency. This, in turn, has seen other countries look to achieve relatively low exchange rates for their own currencies.
The steady rise of the euro was also pegged back last week after European Central Bank president Mario Draghi voiced concerns over the currency’s recent rise.
“A word of concern from the mighty Supermario Draghi on the dangers from an over-strong euro was enough to end the rally that arguably started way back in the summer,” said Alastair Winter, chief economist at investment bank Daniel Stewart.
And on Thursday all of this talk of a currency war is likely to be brought to a head at a potentially seminal two-day meeting of G20 finance ministers and central bank governors in Moscow.
“This week could be a pivotal one for the increasingly lively politics of exchange rates as the G20 meeting is up,” said John Hardy, head of FX strategy at Saxo Bank, a Danish online trading platform.
“It will prove a very interesting occasion to test whether Japan’s move has dented diplomatic politeness and international relations. I’m particularly curious about how China will eventually respond to Japan’s devaluation attempt. It was, after all, China’s massive 1994 devaluation that helped to touch off the Chinese economic miracle, and the CNY/JPY rate is at its highest since late 2008.”
Experts, though, are divided as to whether an all-out currency war will either harm the global economy or, in fact, give it a boost due to all the monetary stimulus being used to bring about devaluation in each country.
This, though, is not at the forefront of the minds of FX traders right now who are happy to be making significant returns once again following a stagnant 2012.