A Dull Quarter in Foreign Exchange

March 27, 2014

Many interesting things developed in the first quarter of 2014.  A changing of the guard at the helm of the Federal Reserve for the first time in eight years was accompanied by new forward guidance and the hint of a sooner first interest rate hike than markets were assuming.  Unusual weather  patterns won over new converts to the view that the planet’s environmental balance is unraveling.  Cold war geopolitics attempted to stage a comeback, and Sino-Japanese foreign policy relations remained strained.  Chinese officials kept their powder dry as more data confirmed slower economic growth there.  The Bank of Japan and European Central Bank likewise didn’t ease further despite good reasons for doing so.  There was a lot of talk about a buildup of financial asset market bubbles.

However, it was a calm period for currency markets, extending a lack of excitement in late 2013.  The table below compares March-to-date dollar averages against the euro and yen to monthly averages during the prior six months.

Period averages Dollars per euro Yen per dollar
March 2014 1.381 102.30
February 1.366 102.01
January 1.361 103.94
December 1.370 103.58
November 1.349 100.11
October 1.364 97.81
September 2013 1.335 99.24


Year-to-date net currency movements are modest for the most part.  Compared to the end of 2013, the dollar currently is down by 5.2% against the kiwi, 3.8% relative to the Brazilian real, 3.6% vis-a-vis the Australian dollar, 3.0% relative to the yen, 0.7% against the Swiss franc, and 0.3% versus sterling.  The greenback also has appreciated 4.1% against the Canadian dollar, 2.4% versus the Chines yuan, 1.9% versus the Turkish lira, 1.6% against the Korean won, 0.8% versus the South African rand, and a minuscule 0.1% vis-a-vis the euro. 

The first calendar quarter is not historically unacquainted with wild currency movement.  The second dollar devaluation and end of the fixed exchange rate era occurred in the first quarter of 1973.  Teutonic movements in European currency relationships occurred in 1Q76; it began with the Italian lira, ricocheted through the EC joint float and ultimately slammed sterling.  During the first quarter of 1987, the dollar soared 10% through February 26 from 3.156 marks to 3.478 but closed the quarter with a net drop of 2.6% against Europe’s dominant currency.  The dollar lost 6.9% of its value against the mark and 8.6% versus the yen in the winter quarter of 1987 but rose 13.9% and 3.8% versus those currencies in the first quarter of 1991 when the Iraq War was fought.  Although the fed funds rate had doubled in the year to end-January 1995, the U.S. currency lost 11.0% against the mark and 12.6% relative to the yen in the first quarter of 1995.  Near the start of an unanticipated recession, the dollar advanced by 7.2% against the euro and 10.1% versus the yen in the opening quarter of 2011, and safe haven demand lifted it by 5.4% and 9.1%, respectively, in the first quarter of 2009.  Abenomics raised dollar/yen 8.6% in the first quarter of last year.

Trade-weighted currency movements in the quarter that ends next Monday have been tiny, too.  The dollar’s up about 1% in such terms.  Sterling and and the euro show trade-weighted rises of 0.6%.  The trade-weighted yen is the big mover in this gang of four with a net gain of a mere 2.8%.

It’s difficult to explain why foreign exchange markets haven’t been more volatile.  Currency movement lately hasn’t been constrained by a lack of interesting data findings or world events, many of which were unexpected and all of which helped to extend this age of uncertainty and put the expression “new new” into the market watcher’s lexicon.  The irony is that far more people than before are trying to make a living trading foreign exchange now because of the ease of entry using any one of many on-line trading platforms and instructional schools.  To be sure, profits or losses hinge on timing very small swings just right, but riding the big waves of yesteryear was an easier strategy to run.  Besides, big currency swings exert meaningful force on macroeconomic trends.  The mild random walk documented in the above table is just noise, with no broader implication other than a magnet for workers who could be making a good or providing a service of real value.  I suspect that reduced volatility and the proliferation of traders may in fact be connected.  Whether or not that is so, a truth for me is that currency markets offered spectators a lot more fun to watch back in the day than such do now. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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