April 2009
FX insight: Three FX questions with Darcy Browne
Darcy Browne, newly appointed managing director of fixed income & currencies at CIBC provides his insights on hot topics in foreign exchange (FX).
How does the currency market look to you?
I think the market is trading nervously during the short term as it switches back and forth from risk taking mode to fleeing from new perceived risks in the global market. The U.S. Federal Reserve’s quantitative easing announcement pushed the markets from an excessively long U.S. dollar position to a more neutral stance. From here, traders are trying to resolve the larger risks at hand, which appear to be stacked between the U.S. economy and stimulus, and the eurozone and lack of stimulus. New themes are constantly evolving and timing them correctly appears to be the key.
What grabs you in the currency market?
The currency market itself has come under scrutiny with both Russia and China pushing to change the U.S. dollar as the World Reserve currency. Governments and economies are struggling with excessive currency volatility due to massive trade imbalances and outright structural problems within the banking industry. As the world struggles to see the light at the end of the tunnel, volatility is spiking in all markets that have a heavy correlation with currency.
The most liquid currency in the world is the Euro, where one-month volatility has risen from below five vols (implied volatility) in June 2007 to peaking near 25 vols in December 2008. It should also be noted that hedge funds in the same period were suffering redemptions and were in risk reducing mode. Love them or leave them, hedge funds provide liquidity for all.
Will the FX market follow the economy? What does this mean for the Canadian dollar?
Yes, to a certain degree. Some countries will emerge as leaders based on their structural and fundamental economic performance and their natural export base, i.e. commodities. Canada will be one of the leaders here. The global landscape has changed and our banking system has emerged as the world’s strongest. Canadian banks have tier 1 capital ratios and credit ratings that are the envy of the world. The markets are currently punishing currencies whose governments are heavily involved in quantitative easing. The Bank of Canada will likely engage in some form of quantitative easing, but only a fraction of that of rival economies. Canada is tied to global growth and we are seeing some signs of bottoming in commodity markets. As a new debtor nation with sound financial institutions, our debt – although small in global terms – is in demand, especially by sovereigns.
By Darcy Browne, managing director, fixed income & currencies, CIBC
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