New York: A Federal Reserve meeting and a referendum on the future of one of the world’s largest economies are set to whipsaw currencies and other assets, according to Pacific Investment Management Co.
A gauge of implied global foreign-exchange volatility jumped by the most in four months last week as traders cut the odds of an interest-rate increase by the Fed at its June 15 meeting. The pound extended a weekly drop and its volatility soared as the latest UK poll on the June 23 vote on Britain leaving the EU, conducted by ORB for the Independent newspaper, showed 55 per cent “Leave,” 45 per cent “Remain.”
“We need to be respectful of the technical uncertainty associated with central-bank policies and increasingly volatile and uncertain politics,” said Daniel Ivascyn, group chief investment officer at Pimco. For the dollar, “the aggressive strengthening theme over the last few years has come to an end — any strengthening will be much more measured,” said Ivascyn, whose Newport Beach, California, whose company has $1.5 trillion under management.
The greenback recouped some of its losses last week after slumping to a one-month low on speculation that the economy won’t be able to withstand higher borrowing costs. The currency has been driven by speculation about the path of monetary policy set by the Fed, which is one of four central banks to meet this week — the others are the Bank of Japan, Bank of England and Swiss National Bank.
The dollar rose 1 per cent last week against the euro to $1.1251. The pound fell 1.8 per cent to $1.4257.
The JPMorgan Chase & Co. gauge of foreign-exchange price swings climbed 10 per cent last week, the most since the five days ended Feb. 12.
Market Positions
Hedge funds and other money managers increased net bullish bets on the dollar for the third week to 145,247 positions as of June 7, according to data from the Commodity Futures Trading Commission. That’s up from 84,149 the week earlier.
The Federal Open Market Committee will end the two-day meeting on June 15 with a policy statement, revised economic projections and a news conference. While traders see a zero per cent chance the Fed will raise rates meeting, there’s a 49 per cent probability the central bank will hike by year-end, futures data show.
The pound has had a tumultuous week, rising and falling in line with polls before a June 23 referendum in which the UK decides whether to remain in the European Union. Trader expectations for price swings climbed to a seven-year high as anxiety about a potential British exit gripped investors.
“Geopolitics is front and centre in how we think about the outlook and potential risks to the markets,” Jean Boivin, the London-based head of economic and markets research at the BlackRock Investment Institute said in a June 7 interview in Montreal. “We are in an environment where growth is fragile, uncertainty is elevated and there is a lot of focus on event risks that geopolitics can present.”
