"Investors betting on increased currency volatility might be the real winners here"Currency: fixing global imbalances - traders become a bit nervous.
September 24, 2009
When politicians start talking about the need to fix global imbalances, currency traders get a bit nervous.
On Thursday, Angela Merkel, the German chancellor, warned that the subject could distract the Group of 20 gathering from the need to fix financial regulation.
In the UK, Mervyn King, governor of the Bank of England, expressed satisfaction with sterling’s weakness and talked about rebalancing the UK economy with more exports.
Mr King has a lot to celebrate. Among major currencies, sterling, not the dollar, is the weakest over the past year. On a trade-weighted basis, it has lost 15 per cent, compared with a mere 2 per cent fall for the dollar (because the dollar’s recent weakness has so far simply reversed its gains in the immediate post-Lehman chaos).
Regardless of past performance, both these market weaklings are expected to fall further – but from here, currency traders will be keeping one eye on political rhetoric to gauge just how much freedom they will be allowed.
Politicians (and investors) know that while currency markets are not quite a true zero-sum game, the reality is close enough. For every country that gets a weak currency to help boost its fragile recovery, another will have to put up with relative strength.
The Swiss franc’s strength against the euro is hovering near levels at which the central bank intervened in June, while European officials are beginning to voice concern about the euro’s strength against the dollar.
Jawboning over currency levels is a long-standing market practice. But traders are a bit nervous in the post-crisis world and will be sensitive to any fresh comments.
Investors betting on increased currency volatility might be the real winners here.
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