But as the world’s financial markets stumbled in the wake of the global credit crunch in September, such directional certainties evaporated. Instead, volatility and uncertainty reigns.
The CVIX, an index of implied volatility in various currencies launched by Deutsche Bank, is currently trading around 20, compared to around 10 in August.
For many FX trading houses, this volatility has been something a boon. Some have enjoyed increased trading flows as investors and companies seek to hedge themselves, put more money into currency gambles as the appeal of equity and bond investments disappears, or restructure FX products that are no longer appropriate for this uncertain world.
But you can have too much of a good thing, and that is increasingly the case now as there are indications that this volatility will disappear any time soon. “Uncertainty has remained quite elevated and that reflects the day to day trading style of a lot of people,” says Mirza Baig, a currency strategist at Deutsche Bank in Singapore.
He adds: “We can see that there are large intra-day ranges in currencies and the market certainly seems to lack conviction. Price action is jumping around a little more than is considered normal in the last few years.”
This lack of clarity has meant that very few so-called experts or FX traders are willing to stick their necks out and make currency predictions over the longer term. Instead, strategists argue that it’s just more prudent to stick to short term predictions.
As one says, “I tend to remind clients that anybody who pretends to have a very clear medium term view is probably just making it up. There is very little clarity that one can offer as to how this entire situation will evolve two or three years down the road.”
The change in focus has also meant that the banks still active in trading FX have had to adapt. “Keeping things simple is probably a good strategy when you don’t have much visibility,” says Bertrand Lavigne, head of interest rates and FX trading for Asia, BNP Paribas. “Having a day-to-day strategy means you can settle your positions quickly in case something crops up that you did not anticipate. In a way, I am pushing to keep things simple.”
Straightforward and vanilla FX trading is set to be the mantra for the coming six months, at least. That isn’t the most welcome news for those investors or clients who prefer a bit of complexity or structure to their FX trades to add to yield or offset hedging costs. It’s also not good for bank FX structured products teams – many could find themselves surplus to requirements.
But for those banks and traders well versed in FX trading, the markets in 2009 will still offer some lucrative opportunities.