Why Top currency pairs are no longer volatile: considerations and solutions
If you are active in the financial markets, you might have noticed an important aspect the past few days. Most currency pairs are simply not moving. This situation has been mostly pronounced in the sterling and euros pairs. As such, it has become increasingly difficult to make money trading these pairs.
There are many reasons for this situation. The biggest one is that central banks around the world have gotten so dovish. In the United States, the Fed has changed its outlook for rate hikes this year. Previously, the Fed was expecting to hike rates at least two times this year. This language has changed to zero rates. There have even been talk about rate cuts and a return to quantitative easing.
In Europe, the European Central Bank (ECB) has changed its outlook for rate hikes (here a focus on main countries). The bank has said that it intends to raise hikes ‘at least through December’. This is a further outlook than what it had said initially, when it said ‘at least through summer.’ This weekend, an ECB member said that the bank could even lower rates further if the situation kept on getting worse.
In the United Kingdom, the BOE has been put between a rock and a hard place. While recent economic data has been bullish, the bank is not at a good place of hiking rates. This is because the country the country's political class has failed to pass a way forward on Brexit. This means that the risk of a no-deal Brexit arw still high.
In Japan, the Bank of Japan (BOJ) continues to face the challenge of low inflation rate. This is despite the fact that the country’ s economy is doing well, with unemployment rate at 2.4%. With inflation below the BOJ's target of 2.0%, it will be impossible for the bank to hike rates. In addition, the country has continued to see a deterioration of the industry and manufacturing sector. It's biggest companies like Nissan and Toshiba have been under pressure. Therefore, it is highly unlikely that the bank will get out of the negative interest rates any time soon.
In the Pacific, the New Zealand and Australia central banks have been hesitant about rate hikes. This is because their economies are under pressure partly because of the weakening of the Chinese and economy. In fact, last week, the Reserve Bank of Australia (RBA) said that it was open to cutting rates, which are currently at 1.75%. The RBNZ too could slash rates.
Around the Emerging Markets, there is also signs that their economies are slowing down. For example, in Turkey the lack of confidence on the Turkish currency has seen it tank against the USD. In South Africa, the economy has continued to weaken.
Therefore, the recent lack of volatility in the major currencies is partly because of the synchronized weakness in the global economy and the dovish response by the central banks. In fact, this year, major organizations that track the global economy, have downgraded the growth prospects for the year. Just last week, the IMF downgraded the growth for the year to 3.3% from the previous 3.5%. OECD and World Bank too have downgraded the economy.
Therefore, as a trader, it is important to change your tact when trading during these periods of low volatility. Instead of focusing on the major currency pairs, you should reconsider looking at other currencies. For example, you can look at the AUD/NZD and EUR/GBP crosses. Doing this will help you spot currencies with the most volatility. Also, you should consider other asset classes like commodities and energies.