Monday, January 24

Currency volatility skyrockets as traders worry about the new variant

Volatility in developed market currencies increased the most in a year as traders took in the impact of the new variant of the coronavirus discovered in South Africa.

Indicators of the volatility of the euro and the yen increased the most since October 2020, a time when investors were preparing for the US presidential election.

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Now, when US traders returned to work after the Thanksgiving holiday, safe havens were in demand amid concerns about the mutation of the virus, with the Swiss franc and the yen leading gains among Group currencies. out of 10. The dollar weakened.

“We are really in a state of flux at the moment and we have little information on how governments will react to the new variant,” said Bipan Rai, head of foreign exchange strategy at CIBC. “The immediate assumption is that it is a new pandemic, which means new restrictions, ergo risk.”

The new strain of the virus, considered a variant of concern by the World Health Organization, stirred the markets. It carries a large number of mutations in its spike protein, the part of the virus that vaccines target. That has already prompted several governments to tighten travel restrictions, despite investigators not saying whether it is more contagious or deadly than others.

Still, the news of the variant comes at a critical moment in the global economic recovery, as central bankers consider raising interest rates, which they cut at the beginning of the pandemic.

Money market bets on interest rates and whether the new variant will derail growth could drive exchange rate price action until more information is out, Rai said. In the case of central banks in Canada and New Zealand, where upside bets were priced “appallingly,” currencies may weaken as commodity prices also plummet, he added.

The Bloomberg Dollar Spot Index, which strengthened to the highest level since July 2020 on the previous Friday, fell for the first time in six trading sessions. Yields on 10-year US Treasuries fell as much as 16 basis points. The drop in rates comes just days after the re-election of Federal Reserve Chairman Jerome Powell was interpreted as a harbinger of faster interest rate hikes in the world’s largest economy.

The euro rose 1% to trade at 1.1320 to the dollar, the biggest gain since December.

“Over the medium term, we expect the dollar to stay ahead, but a healthy correction may be necessary before EUR / USD can break past recent lows,” said Jane Foley, head of foreign exchange strategy at Rabobank in London.

Friday’s risk-off mood also helps explain demand for so-called funding currencies like the yen and franc, according to Marc Chandler, global market strategist at Bannockburn Global. The underperforming currencies of developed countries continue to find buyers as investors abandon their positions in stocks and assets in emerging countries, from currencies to rates to credit.

“These currencies are used to finance other currencies,” Chandler said in an interview with Bloomberg Television. “So when stocks and emerging markets weaken, people have to buy back those funding currencies.”

© 2021 Bloomberg

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