Currency surprises a feature of 2015

After so many shocks, currency traders are ending the year fully expecting another bolt from the blue.

Three major foreign exchange shocks stand out for 2015 — January’s depegging of the Swiss franc, August’s renminbi devaluation and December’s euro correction. Each was the result of a market dramatically caught unawares by central bank action.

Throw in some wild intraday currency movements and a host of unexpected central bank rate decisions, and it is small wonder many currency traders are ending the year exhausted and out of pocket.

“There have definitely been some surprises,” says GAM investment director Adrian Owens. “We’ve had to get used to central banks being more influential.”

The Swiss National Bank set the tone. Looking to pre-empt the launch of the European Central Bank’s quantitative easing programme, the SNB held an unplanned meeting to abandon the floor set for the Swissie’s exchange rate against the euro, only three days after describing it the “cornerstone” of its policy.

The tremors from that January 15 earthquake created swings of as much as 40 per cent against its main currency rivals. FX brokers were scorched, as were various parts of the export-based Swiss economy.

Was it worth it? “At the time, the SMB was seen as being fairly canny,” says BNY Mellon’s FX strategist, Neil Mellor. But while the Swissie duly weakened against the dollar, the US provides only 10 per cent of Switzerland’s trade.

“It has 60 per cent of trade with the eurozone, and that’s where they need currency weakness,” he says. The Swiss economy has stalled, mired in deflation. After the drama of de-pegging, the SNB has resorted to do-nothing, with little to show for it.

“They can’t persist with this strategy ad infinitum. But the problem is there’s not really a great deal they can do,” Mr Mellor says.

If the SNB deliberately chose a strategy of surprise, the People’s Bank of China appears to have stumbled its way to its August 11 currency shock — when it unexpectedly changed the way it set the trading range for the renminbi — through a combination of poor timing and inept communication.

Just days before, investors had digested unexpectedly soft trade data that raised fresh questions about the risks of a hard landing for China’s economy.

“There are question marks around communications for sure,” says Mitul Kotecha, head of Asia currency and rates strategy at Barclays.

China, he points out, should have been alert to the market looking at the timing of the soft data closely followed by the renminbi devaluation, and thinking, “what do they know that I don’t?”

Even though the renminbi lost only 3 per cent in three days, the shift had already registered. As emerging markets tumbled, a spooked Vietnam widened the trading band for its own currency twice in the wake of China’s move, while Kazakhstan dropped its currency peg altogether. The tenge then fell 30 per cent.

Elsewhere, commodity prices from metals to oil lurched lower on fears a weaker China would worsen oversupply.

“China had bigger repercussions than the SNB — it hit risk assets globally and it stopped the Fed raising rates in September,” says Mr Kotecha.

He sees less chance of a repeat if the PBoC learns lessons from the turmoil. But the key risk for a similar shock may lie in whether the PBoC better communicates with other central banks.

Federal Reserve chair Janet Yellen made clear in September that “uncertainties” about China were a key reason for the decision to postpone an expected policy tightening.

While communications between the central banks of the US, the UK, the Eurozone and Japan deepened in the wake of the financial crisis — or are believed to, at least — few PBoC-watchers seem clear on the degree to which officials chat with their peers.

One reassuring clue may have come just days ahead of the long-awaited US rate rise, when the PBoC published details of a broader currency basket against which to measure the renminbi.

Yes, the announcement was inconveniently late on a Friday, but it was more detailed than previous efforts. The following Monday, the renminbi duly weakened — but it did so without affecting other currencies.

December’s euro correction further exposed why central bank communication, when it goes wrong, has the capacity to shock. Investors expected a hefty dose of easing from the European Central Bank and they bet big against the euro.

When the ECB did not deliver on market expectations the euro swung upwards by 4.5 per cent and currency strategists hastily revised their euro-dollar forecasts.

On one hand, Mr Draghi’s misfortune simply serves to show up the paucity of his options, says Mr Mellor. “The only thing that can help the eurozone economy is a weak euro and a boost to trade,” he says.

But then again, if only central banks were not so insistent on micromanaging their communication strategies, market shocks might not be so frequent.

Instead, says Mr Mellor, “every nuance in their texts is picked over and instigates a big move. It’s not a healthy state of affairs”.