Volatility has reawakened in the $5.1 trillion foreign-exchange market as traders start to imagine life without ultra-easy monetary policy.
The impact is greatest in the currencies with most at stake from an end to years where stimulus only got more generous—the so-called high yielders. A gauge of expected swings in emerging-market currencies has surged above an equivalent measure for developed markets by the most since May.
European Central Bank President Mario Draghi this month downplayed the need for an expansion of quantitative easing, while speculation has grown that the Bank of Japan could scale back longer-term bond purchases. Traders see better-than-even odds of higher U.S. interest rates by year-end.
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"The ECB refraining from extending QE, combined with the belief that the BOJ might be concerned that the yield curve is too flat, seemed to have behaved as a catalyst for yield curves to steepen globally," said Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA in London. "The impact of steepening has gone through risk, and the currencies which are most sensitive to risk have moved the most" and among Group of 10 peers, that's higher-yielding ones such as the Australian, New Zealand and Canadian dollars, he said.
The South African rand and Mexican peso have been the worst-performing major currencies over the past month, with declines of at least 6 percent against the greenback. Australia's dollar has weakened 2.5 percent, the most among developed-market peers.
The Aussie was little changed at 74.66 U.S. cents as of 8:53 a.m. New York time after dropping as much as 0.3% following data showing employers unexpectedly cut jobs in August. The yen was little changed at 102.47 per dollar. The euro fluctuated at $1.1248.
A JPMorgan Chase & Co. index of three-month emerging-market currency volatility has climbed to 10.9% from 9.6% a week ago. The gap to the equivalent Group of Seven gauge widened to half a percentage point for the first time since May 27 after being negative for most of that period.
Expectations for swings in the Australian dollar against the greenback climbed to 11.5%, from 10.3% on Sept. 8. That was near the 19-month closing low of 10.1% on Aug. 8.
The Dec. 14 Federal Open Market Committee decision has only just entered the three-month horizon. Futures put the odds of action at the meeting at 50%, from 36% at the start of August, based on data compiled by Bloomberg. The odds for higher rates following the Sept. 20-21 meeting are 18%.
"The view that central banks are not inclined to be pressing their policy pedals even further to the metal is boosting currency volatility," said Ray Attrill, global co-head of foreign-exchange strategy at National Australia Bank. in Sydney. "And that is showing up more in emerging markets than developed markets."
Bloomberg News
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