The Chinese year of the dog was a tough one for financial markets. Last week saw the start of the year of the pig which is meant to herald a carefree period, but for Asian currencies the start of the year has been far from carefree, kicking off with unexpectedly volatile moves. The yen and the Aussie dollar both felt the impact of big swings in January. And this week it was the turn of the kiwi dollar, which jumped as much as 1.7 per cent on February 12. So what's behind these unexpected lurches?
Every day, there is a period of a few hours between the closing of the main US market and the opening of Asia's biggest exchanges. During that time, trading can be very thin, which makes prices more volatile. It's an issue that is even more pronounced on public holidays. The yen's leap of close to 4 per cent on January 3 was triggered by investors dashing for the safe haven of Japan after Apple issued a warning about weak sales in China. The fact that Japanese markets were closed at the same time only heightened the size of the swing.
Individual Japanese traders have a role to play. They represent about a tenth of all currency trades in Japan and like selling the yen and buying higher yielding currencies like the Turkish lira, but this so-called carry trade doesn't work when the yen rises, forcing investors to cut their losses and buy yen again, a move that further amplifies the currency's rise. And automated trading adds fuel to dramatic swings when tools like stop-loss algorithms are triggered when a currency falls below a set value, but there are also some more fundamental reasons behind shifting prices. Back in late 2018, investors thought central banks were getting ready to tighten monetary policy. Then, in January, Jay Powell, from the US Federal Reserve, poured cold water on that idea when he said the next move in US interest rates could be down instead of up, following sluggish growth in China and Europe. The Bank of England followed suit with a dovish about turn in early February.
And traders were probably caught off guard when New Zealand's central bank didn't cut rates but kept them steady, setting off this Tuesday's hike in the currency value. The year of the pig is meant to be carefree and joyous, but for currency investors the outlook is less sanguine with more volatility on the cards.