QIR3 Sneak Peek: The End of the Federal Reserve’s Tapering & the Revival of FX Volatility

As the industry is living through the highest levels of FX volatility in a while, our team aims to answer

Federal Reserve logoSince the Federal Reserve announced the start of its quantitative easing tapering effort back in December 2013, we have seen global markets yawning at the prospect of big changes coming. As volatility across the foreign exchange market is closely intertwined with other asset classes, traders got exhausted by the lack of driving news and activity on the foreign exchange market subsided in H1 of 2014.

There have been many events throughout the year which triggered one or two days of volaitlity, however, nothing was conclusive until the approach of the end of the Federal Reserve’s tapering effort neared.

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Granted, we also have to underline the European Central Bank’s (ECB) important role in contributing to the increased FX volatility, as its unprecedented negative deposit rates policy and the prospect of a big balance sheet expansion have undoubtedly changed the currency markets landscape.

However, there is a bigger factor in play, because the US dollar has been a stellar performer ever since the beginning of the third quarter against all majors.

As the U.S. Commodities Futures Trading Commission (CFTC) has been releasing its weekly data about FX futures positioning, it turned out that there has been a major consensus among speculators that the US dollar will continue on its way higher and continue charging as the recovery in the US stays strong and the rest of the world is wobbling.

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In the middle of October, on a given Wednesday we saw a huge liquidation of US dollar longs, which was brought with some doubts by the bond market that the FED will manage to raise interest rates as soon as next year.

However, following the last meeting of the Fed which announced the end of the central bank’s buying program, the Federal Reserve highlighted that it is bullish on employment and on inflation. All US dollar longs have been reestablished as it hits new multi-year highs across the board.

In our report we have contacted Sucden Financial’s Senior Research Analyst, Myrto Sokou, to get a grasp about the current market expectations and an already familiar face for the readers of our Q2 Quarterly Industry Report – Euro Pacific Capital’s CEO, Peter Schiff.

Widely known for his skeptic views about the Federal Reserve’s policy measures, Peter again is expressing a different view to the one presented by market pundits and conventional economists.

Will the Federal Reserve manage to exit its year’s long stimulative policy effort without risking the health of the US economy and how will the foreign exchange market react to future rate hikes, if any?

If these and many other industry related matters interest you, take a look at our latest Forex Magnates Q3 Quarterly Industry Report and the article discussing the Federal Reserve’s itchy trigger finger which can bring even more volatility into the global foreign exchange market.

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