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Foreign Exchange

Weekly review: When an FX slowdown is interesting; facing the future

A summer slowdown is not normally something to get the pulse racing, but this year it comes with a twist.

Half the market might be at the beach – no doubt armed with a smartphone as well as sun cream – but that alone does not account for the drop in volatility. Indeed, as we noted this week, implied volatility dropped to its lowest level since the start of the financial crisis.

That has in part been driven by optimism over the “Draghi put” – with the president of the European Central Bank (ECB) last month promising to do “whatever it takes” to save the euro – and also by hopes of QE3 in the US.

Interest in carry trades has picked up, but, as we pointed out this week, periods of calm often end violently in the FX market. For those who want to buy into the new optimism, Deutsche Bank reckons that in EM, the RUB and the ILS are the stand-out carry trade target currencies.

There is, of course, plenty of event risk ahead, with investors watching to see whether the ECB and the Federal Reserve will deliver and provide more of the stimulants the markets crave.

Our colleagues at BCA Research are certainly sanguine over the rebound in risk, this week explaining why they believe it is too early to buy cyclical currencies.

Meanwhile, if you are thinking that QE3 automatically translates into a weaker USD, then guest writer Peter Redward delivered an insightful view on why that might not necessarily be the case.

As Redward points out, there is a widespread misconception that QE involves an expansion of the money supply, is inflationary, and therefore negative for the dollar. Rather, he argues, the Fed’s QE programme is effectively sterilized intervention.

USD bulls will also be encouraged by a report from Nomura, which shows that the official sector has a re-found appetite for dollar reserves.

If that was not enough, there is increasing interest in China, where the RMB-appreciation story looks to finally have run its course. We take a look at the opportunities that creates.

So, it is certainly not a boring summer lull – it is more like the prelude to what could be an explosive third quarter in the markets.

Facing the future

Elsewhere, there was more news from Icap, the owner of the EBS electronic broking platform that has been undergoing an overhaul under new chief executive Gil Mandelzis.

This time the focus was on Icap’s voice-broking business, which it has restructured to reflect the global nature of its business.

There was change, too, at CLS, the FX markets’ cash-settlement system, which unveiled a JPMorgan veteran as its new chief executive.

We also report on a survey that suggests Treasury divisions are poised to assume a larger role in the management of their trading business amid rising regulatory requirements and increasing macro-economic uncertainty.

Meanwhile, the jobs market keeps turning at the large FX banks, with the departure of Morgan Stanley’s FX COO and a senior appointment at Nomura among the highest-profile changes.

All in all, quite a bit of action in a week when half the market was supposed to be building a sand castle.

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