FX Tranquillity Shows Faith in Fed Staying Course in Stock Rout

(Bloomberg) -- The currency market has a message for global investors: Don’t assume the sell-off in U.S. stocks will knock the Federal Reserve off its tightening path..Investors have refrained from piling into traditional haven currencies and foreign-exchange volatility has been held in check. While the U.S. share-market turmoil of the past few days has encouraged some trimming of bets on Federal Reserve interest-rate increases, the current scale of the risk sell-off appears unlikely to derail the central bank’s plan to tighten policy. Some observers point to February, when a spike in equity volatility did little to deter the Fed from its path. That, along with the global nature of the stock-market rout, may be helping FX markets to remain relatively circumspect..Appetite for the Japanese yen remained relatively muted even as the U.S. stock sell-off extended to equity markets in Asia and Europe, while the Swiss franc has actually fallen versus the euro. Showing how FX moves have been contained, a JPMorgan Chase & Co. index of G-7 volatility actually slid Wednesday and an equivalent gauge for emerging-market currencies is below last week’s closing level..“The scale of the moves in FX is not remarkable, suggesting that investors don’t yet see the equity moves as a game-changer, ” Westpac Banking Corp. strategists including Sean Callow wrote in a note Thursday..The euro is up more than 0.6 percent over the past two days against the franc at about 1.14724, while the yen is up less than 1 percent against the dollar. The Australian dollar cross rate against the Japanese currency, often viewed as a global barometer of risk, has recovered some ground after dipping Wednesday..“We saw something similar in February where the spillover into currency markets from an equity-specific sell-off was limited,” said Viraj Patel, a currency strategist at ING Groep NV. “If this is just ‘deja vu’ when it comes to the equity market sell-off and VIX spike, then it’s just an equity-market correction that has a small and trivial spillover into FX and bonds.”.The current bout of equity turmoil is yet to match the February 2018 episode and “if anything, the Fed sounds even more confident” about the resilience of the U.S. economy than it did in the first quarter, according to the Westpac strategists. The Fed will probably regard the equity pullback as immaterial to the growth and inflation outlook, meaning there’s little prospect of policy makers stepping in with rate cuts to stem a slide in stocks, they wrote. “If that’s the case, it is probably wise for FX markets to not be aggressive in response to this bout of equity turbulence.”.Treasury Focus.ING’s Patel is watching haven bonds, as a continued stock sell-off that pushes yields down by 10 to 20 basis points could trigger a move in currency markets and see the yen appreciate to 110 to the dollar, he predicts. That would be the strongest level for the Japanese currency since Aug. 21..Recent spreading widening in Treasuries could explain at least some of the quietude, according to Steve Barrow, head of currency strategy at Standard Bank in London. The risk-off flight to the yen is being counter-balanced by spread-widening in Treasuries, he said..As for the rest of the market, Barrow wasn’t entirely certain, but pointed to correlation between global equities markets as a possible factor. “Stock markets move so much in tandem, they’re so highly correlated,” he said by phone. “It doesn’t give currencies as much room for variation than we would’ve seen in the past.”.Until recently, any market uncertainty has provided support for the dollar and traditional beneficiaries of risk-off sentiment haven’t been getting the usual traction, said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce..“The longer-term presumptions of risk-off tendencies benefiting the Swissie and the yen are going to come back into play,” Stretch said..To contact the reporters on this story: Anooja Debnath in London at adebnath@bloomberg.net;Austin Weinstein in New York at aweinstein18@bloomberg.net.To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Benjamin Purvis, Mark Tannenbaum.©2018 Bloomberg L.P.

Bloomberg

Company

Financial Products

Enterprise Products

Media

Customer Support

Communications

Industry Products

Media Services

Follow Us

Bloomberg Customers

BloombergQuint

BloombergQuint

FX Tranquillity Shows Faith in Fed Staying Course in Stock Rout

Bloomberg Quint