Currency traders looking for the direction of the dollar should prepare for a bumpy ride and may need to pay more attention to politicians than economists in the coming months.
Major currency volatility rose the most on record as the UK Brexit vote roiled markets on Friday, sending the pound to the lowest in more than three decades and spurring the yen to gains between 3% to 12% against its 31 biggest counterparts.
Reverberations from the British decision, Spanish elections and the US presidential election may have a bigger influence on the dollar for the rest of this year than the Federal Reserve, which traders expect to stand pat on interest rates.
“The political uncertainty that we have right now is overwhelming central bank uncertainty, and so that’s where the focus is,” said Chris Gaffney, president of EverBank World Markets in St Louis. “You can price fundamentals, you can price in economic data – politics are unpredictable.”
Strategists and investors compared the aftermath of the Brexit vote with other tumultuous periods in financial markets, including the bankruptcy of Lehman Brothers Holdings in 2008, the Asian financial crisis in 1997 and “Black Wednesday” in 1992, when the UK exited the European Exchange Rate Mechanism. Investors bought haven currencies such as the dollar, yen and Swiss franc this week, shunning riskier assets.
“This is an historic event – you have one of the most important countries in the EU sending a very strong message that this Europe doesn’t work, and there is a lot of dissatisfaction,” said Alessio de Longis, a New York-based money manager in OppenheimerFunds’s global multi-asset group, which manages about $5bn. He’s buying the yen against other Asian currencies, while selling the pound and euro.
The Bloomberg Dollar Spot Index, which tracks the US currency against 10 major peers, rose 0.7% last week.
The greenback rose 1.4% to $1.1117 per euro in the five days to Friday and fell 1.9% to ¥102.22. Hedge funds and other money managers boosted net bullish positions on the dollar for the fourth week in five, according to data from the Commodity Futures Trading Commission.
A JPMorgan Chase & Co measure of volatility in Group-of- seven currencies rose 2.68 percentage points to 12.61% in the aftermath of the British decision. Upcoming political events include Spain’s general election Sunday and the US presidential vote on November 8.
“This throws big risk into any position you put on, or any view you have,” said Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets.
“It’s not just about the big payrolls number or the latest central bank meeting - this is a big risk and it causes moves like we saw last night. When has a currency moved 10% on a data point?”