[TOKYO] Currency traders are getting whiplash from the pile-up of policy surprises that have come their way in the past six months. And because the big events have been unexpected, they're struggling to translate rising volatility into bigger profits.
The Bank of Japan's decision to adopt negative interest rates, a week after Governor Haruhiko Kuroda said they weren't being considered, was the latest jolt.
The yen's 1.9 per cent drop after the move was its biggest in more than a year, yet it paled in comparison to the euro's 3.1 per cent surge when the European Central Bank failed to impress with its December stimulus boost. China has switched policy several times since it devalued the yuan in August.
Swings in these currencies helped push JPMorgan Chase & Co.'s G-7 Volatility Index up by 7 per cent since Dec 31, yet investors have made less than 0.4 per cent, based on a Parker Global Strategies LLC gauge that tracks top foreign-exchange funds.
It's a frustrating start to the year for traders: while they need volatile markets to make money, they can't capitalise on moves they don't see coming. They're hoping to do better than in 2015, when returns dwindled amid a series of policy surprises from Switzerland ditching its currency cap to the Federal Reserve raising rates later than some expected.
"While some volatility is always good for the market for sure, unforeseen policy-induced volatility can be very damaging," said Alvin Tan, a London-based strategist at Societe Generale SA.
The BOJ announcement last week "was a shock and caught a market that was increasingly long-yen. It hurt a lot of people."
JPMorgan's gauge of anticipated price swings was at 9.86 per cent on Monday in New York, up from 9.23 per cent at the end of last year. Last month, it posted its biggest increase since August.
The Parker index of 14 currency funds fell on Jan. 28 to the lowest level since the start of 2016. It dropped 0.9 per cent on Dec. 3, the most since the measure began in 2003, when the reaction to an extension of the ECB's quantitative-easing program sent the euro surging by the most in 6 1/2 years.
The euro touched an eight-month low of US$1.0524 that day, and has since rebounded. The yen slumped to a more than one- month low of 121.69 per dollar after the BOJ announcement on Friday, about a week after reaching its strongest level in a year. Europe's common currency rose 0.1 per cent to US$1.0897 as of 10:05 am in Tokyo, while the yen gained 0.1 per cent to 120.91 per dollar.
Markets must now grapple with whether to accept ECB President Mario Draghi's Jan 21 assurance of further stimulus, and how much further Kuroda can expand efforts to stoke Japan's economy. Futures prices suggest traders doubt the Fed's projected four rate increases before 2016 is out.
"There's plenty of scope for more market whipsaws this year driven by policy makers," said Sean Callow, a foreign-exchange strategist in Sydney at Westpac Banking Corp. China's clampdown on speculators betting against the yuan "can't be maintained indefinitely," and "markets have been aggressive in pricing out Fed hikes, so there's plenty of scope for reappraisal there too."
The ECB's meetings have been "reliable sources of volatility," said Callow, who predicts BOJ policy will be constantly questioned, stoking yen price swings.
The BOJ announcement caught speculators unawares, with bullish yen bets in the run-up to the decision reaching the most since 2012, according to the Commodity Futures Trading Commission.
Goldman Sachs Asset Management said that day it removed a short-yen position on the assumption the central bank would disappoint investors by how far it was willing to ease policy.
Another Asian imponderable is China.
Markets have already grappled with two episodes when the PBOC devalued the yuan only to push back against bears later. Both instances - in August and late December through January - caused a sell-off in currencies dependent on Chinese growth such as the Australian and Canadian dollars.
"Currency flexibility is a good thing in general, helping keep the economy balanced," said Greg Gibbs, director of Amplifying Global FX Capital in Breckenridge, Colorado. "But it's not immediately clear that pursuing a weaker exchange rate will be in the interests of China. Or the global economy."
Officials are being driven to action, or - potentially - inaction in the US's case, as a rout in equity and commodities markets compounds concern global growth is slowing. The varying policy stances in the world's biggest economies are aggravating foreign-exchange moves and stoking speculation about competitive devaluations, known as a currency war.
Neil Mellor, a London-based strategist at Bank of New York Mellon Corp., wrote Jan 29 that he sees the BOJ decision to join the negative-interest-rate club "in the context of a race to the bottom for monetary policies globally, and against a backdrop in which a number of central banks are contemplating their own easing measures despite the growing threat to financial stability."