As the value of the Canadian dollar plunged the most in more than three years in just two minutes, Brad Schruder remembered a lesson he’d learned in the chaos of the financial crisis.
“Prices on a screen can no longer be trusted,” Schruder, a director of foreign-exchange sales at Bank of Montreal said Wednesday from Toronto. “No one knows what a price is.”
Volatility in the $5.3 trillion-a-day currency market has become too much of a good thing for many traders, who usually depend on fluctuations in exchange rates to generate profits. Price swings surged to the highest level in a year and a half as surprise moves such as the Bank of Canada’s interest-rate cut on Wednesday left investors unable to keep up with changes as quotes flashed on computer screens.
Traders and speculators were
already feeling pain from the Swiss National Bank’s shock decision on Jan. 15 to stop capping the franc’s value against the euro. Citigroup Inc., Deutsche Bank AG and Barclays Plc suffered about $400 million in cumulative trading losses, people familiar with developments said last week, and Credit Suisse Group AG and Saxo Bank A/S both said the move may hamper earnings.
Middle Men
Four days later, Denmark unexpectedly cut interest rates to defend the krone’s peg to the euro in an effort to silence speculators betting the Nordic country would follow Switzerland in severing ties.In December, Norway’s central bank lowered its main rate for the first time in more than two years and signaled it may ease again next year, sending its currency to the weakest since 2009.
The surprises have helped drive volatility among Group of Seven currencies to the highest level since June 2013, after wallowing near record lows through the middle of last year, JPMorgan Chase & Co. indexes show.
Traders make their money as middle men in the foreign-exchange market, quoting prices to buyers and then going in search of sellers. When prices move as fast as they have been lately, the time between giving a customer a quote and actually securing the currency may open a trader to losses, Bank of Montreal’s Schruder said.
ECB Speculation
The spike in volatility comes as a collapse in crude oil prices, which have fallen more than 50 percent since June, provides another headwind to inflation worldwide. At the same time, central banks from Canada to Europe to Japan have been working to head off disinflation or outright deflation.The European Central Bank will make its own policy announcement today. ECB President Mario Draghi has proposed unleashing a debt-buying spree of 1.1 trillion euros ($1.3 trillion), two euro-area central-bank officials said Wednesday, asking not to be identified as the proposal is confidential.
“Commodity prices have come down rather sharply and it will definitely have some impact on central-bank policy reactions across the world,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank in New York, said by phone Wednesday. “The ECB is having to respond, and the Swiss National Bank is responding to the ECB, and the Bank of Canada is responding to the external shock in a different way.”
Oil Shock
The Bank of Canada became the first central bank in the G-7 to cut interest rates in response to plummeting oil prices, saying the shock will weigh on everything from inflation to business spending. Oil is Canada’s biggest export. The quarter-point reduction to 0.75 percent ends a four-year pause in rates, and no analyst in a Bloomberg survey saw it coming.The loonie, as the Canadian dollar is called for the image of the aquatic bird on the C$1 coin, fell as much as 2.3 percent Wednesday to C$1.2394 per U.S. dollar, the weakest since April 2009 and the biggest one-day decline since September 2011. It was at C$1.2338 as of 11:27 a.m. in London today.
On Canadian Imperial Bank of Commerce’s foreign-exchange trading desk in Toronto, the central bank’s announcement re-created a scene that had played out only the week before when the Swiss abandoned their currency peg.
“Immediately, the traders start yelling,” said Darcy Browne, managing director of currencies at CIBC. “Liquidity disappears, initially, so the first thought is, we’re in for a wild one.”
A few hours later, the movements slowed. Browne, already looking forward to the ECB meeting, said he prefers the excitement of high volatility to the boredom of last summer’s low volatility.
“There’s an old saying,” he said by phone from the trading desk. “If it was easy, anyone could do it, and they’d do it for a lot less. You get paid when the going gets tough in this industry.”
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