Currency Volatility at Almost Lowest Since May on Fed

By John Detrixhe - Aug 9, 2013 11:34 PM GMT+0400

A gauge of currency volatility fell to almost the lowest level in three months as traders weigh whether economic gains will be enough for the Federal Reserve to reduce stimulus measures next month.

The yen rallied against the dollar as Japan’s national debt exceeded 1 quadrillion yen for the first time, underscoring the case for a sales-tax increase to shore up government finances. JPMorgan Chase & Co.’s G-7 Volatility Index touched 9.11 percent, the lowest level since July 24 and at almost the lowest level since May 9. Norway’s krone rose the most in five weeks versus the euro after inflation unexpectedly accelerated in July.

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Stacks of U.S. $0.25 coins, or quarters, are arranged for a photograph in New York. The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major counterparts, fell 1.1 percent from Aug. 2 to 1,017.52 at 10:02 a.m. in Tokyo. Photographer: Scott Eells/Bloomberg

4:58

Aug. 8 (Bloomberg) -- Yujiro Goto, foreign-exchange strategist at Nomura, talks about the outlook for the yen, Bank of Japan monetary policy and Japanese investor sentiment. He speaks in London with Bloomberg's Niki O'Callaghan. (Source: Bloomberg)

5:26

Aug. 5 (Bloomberg) -- Greg Gibbs, a foreign exchange strategist at Royal Bank of Scotland Group Plc, talks about the outlook for global currencies. He speaks from Singapore with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)

“It’s a repricing of taper expectations,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview. “Investors have ratcheted expectations for the Fed to act in September and moved up the likelihood of action in December.”

The dollar fell 0.5 percent to 96.17 yen at 3:33 p.m. in New York, having dropped 2.8 percent this week, the most since the period ended June 14. The U.S. currency rose 0.3 percent to $1.3347 per euro after depreciating to $1.34 yesterday, the weakest since June 19. The euro fell 0.8 percent to 128.34 yen.

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major peers, was little changed at 1,016.56 after dropping to 1,015.49 yesterday, also the lowest since June 19. The gauge has declined 1.2 percent this week.

Krone, Loonie

Norway’s krone rose to a seven-week high against the dollar after Statistics Norway said inflation, adjusted for taxes and energy prices, was at an annual 1.8 percent, compared with 1.4 percent in June. Underlying consumer prices increased 0.4 percent.

“The inflation data in Norway rules out any cut in rates for now,” said Valentin Marinov, head of European, Group of 10 currency strategy at Citigroup Inc. in London. “The krone could recover more ground as we move closer to the Norges Bank meeting in September.”

The krone jumped 1.2 percent to 7.8118 per euro after adding as much as 1.3 percent, the biggest gain since July 8. Norway’s currency strengthened 0.9 percent to 5.8538 per dollar after touching 5.84, the strongest level since June 20.

Canada’s dollar touched the strongest level in a week as oil, the nation’s largest export, and other commodities surged, overshadowing an unexpected drop in Canadian employment. The loonie rose 0.5 percent to C$1.0280 per U.S. dollar after gaining to C$1.0276, strongest since Aug. 1.

Aussie Gains

Australia’s dollar headed for its biggest weekly advance since December 2011 after amid signs of growth in China, its largest trading partner. The currency rose against all of its 16 major counterparts today after the Reserve Bank of Australia damped expectations for further easing after cutting its key interest rate to a record low this week.

China’s “industrial production number was the one that everyone was looking for,” said Chris Weston, chief market strategist at IG Markets Ltd. in Melbourne. “It’s been a good read on the real economy and it blew expectations out of the water. This is good news for Australia.”

Australia’s dollar climbed 1 percent to 91.95 U.S. cents after advancing to 92.15 cents, the highest level since July 29. The currency has appreciated 3.3 percent this week, the most since the period ended October 2011.

Volume Falls

Trading in over-the-counter foreign-exchange options totaled $12 billion, compared with $25 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $2 billion, the largest share of trades at 19 percent. Options on the euro-dollar rate totaled $1.8 billion, or 16 percent.

Dollar-yen options trading was 65 percent less than the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 48 percent less than average.

The Fed has been purchasing $85 billion in Treasuries and mortgages each month in a program known as quantitative easing to put downward pressure on interest rates.

Chairman Ben S. Bernanke rattled markets in May and June by outlining a plan to end the program, and Fed officials this week indicated greater willingness to begin tapering stimulus.

Fed Presidents

“I would clearly not rule” out a decision to start dialing back the purchases at the Sept. 17-18 gathering of the Federal Open Market Committee, Chicago Fed President Charles Evans said on Aug. 6. Cleveland Fed President Sandra Pianalto said on Aug. 7 she “would be prepared to scale back” purchases if the labor market remains on a strong path.

“There has been a pretty significant decline in volatility over the past couple of months,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview. “It does have to do with markets waiting on central banks for the next move.”

Japan’s outstanding public debt including borrowings reached a record 1,008.6 trillion yen ($10.46 trillion) as of June 30, up 1.7 percent from three months earlier, the finance ministry said in Tokyo today.

The world’s heaviest debt burden -- larger than the economies of Germany, France and the U.K. combined -- will weigh on Abe when he decides next month whether to implement a two-step plan to double the tax on consumers in a nation with ballooning welfare costs.

The dollar has slumped 3.7 percent in the past month, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1 percent and the yen gained 1.8 percent.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net