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Analysis-Surging dollar awakens volatility in currency markets

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November 24, 2021

By Saqib Iqbal Ahmed and Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Volatility is bubbling up in foreign exchange markets, as bets on how aggressively central banks will tighten monetary policy in the face of surging inflation boost the dollar and exacerbate swings in global currencies.

The Deutsche Bank Currency Volatility Index, which measures expectations for gyrations in FX, has in recent weeks shot from a three-month low to its highest level since March, driven by gyrations in the U.S. dollar, euro, and Japanese yen as well as a broad range of other currencies.

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Driving the swings are the diverging outlooks of central banks, which are moving at different speeds to normalize monetary policy after many cut interest rates and enacted extraordinary measures last year to buffer their economies from the damage wrought by the COVID-19 pandemic. Expectations of higher rates tend to boost a currency’s allure to yield-seeking investors.

GRAPHIC: Frisky FX: https://fingfx.thomsonreuters.com/gfx/mkt/zdvxonbrqpx/Pasted%20image%201637679371646.png

Increased gyrations in foreign exchange markets can provide investors with the swings they need to make money trading currencies against one another. Too much volatility, on the other hand, could force investors to pare their risk and create problems for international companies that need to convert profits back into their home currencies.

Though the volatility is still low compared to historical levels, some investors believe the gyrations are unlikely to subside anytime soon. Volatility in bond markets, also heavily driven by rate expectations, has been on the rise for weeks.

Many are also taking steps to protect their portfolios against excessive market swings, driving hedging activity in many currency pairs to its highest level in months.

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“We have divergence of policy, divergence of inflation rates … divergence of economic growth rate,” said Lisa Shallet, chief investment officer at Morgan Stanley Wealth Management. “Divergence overall is going to be the name of the game in 2022 and investors are starting to sniff it out.”

Much of the recent volatility has emanated from an accelerating rally in the U.S. dollar, which is benefiting from bets that the Federal Reserve will need to unwind its government bond buying program and eventually raise rates at a faster pace than other central banks.

The U.S. currency is up 9.1% against the euro this year, on pace for its biggest annual gain in six years. It has also gained 11.6% against the Japanese yen and 7.0% against the Australian dollar.

GRAPHIC: King dollar: https://graphics.reuters.com/USA-MARKETS/lbvgnbewdpq/chart.png

Richard Benson, co-chief investment officer at Millennium Global Investments in London, is betting the dollar will continue appreciating against the euro, expecting the Fed to tighten monetary policy next year faster than the European Central Bank in the face of burgeoning U.S. growth and inflation.

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“The underlying fundamental view is that the Fed is raising interest rates over the next 12 months, and the ECB is not,” he said.

Fed funds futures, which reflect investors’ monetary policy expectations, on Wednesday had factored in a 100% chance that the Fed will raise rates by next June. Eurozone rate futures, meanwhile, have fully priced a 10 basis-point hike by December 2022.

Other factors driving currency moves include COVID-19 worries, which are weighing on the euro and other European currencies as the region faces another wave of the pandemic while also boosting the Swiss franc, a popular destination during uncertain times.

Concerns over a potential war with Ukraine have tripped up the Russian ruble in recent weeks, while Turkey’s lira has plunged 25% this month after President Tayyip Erdogan pressured the country’s central bank to pivot to an aggressive easing cycle, potentially sparking a full-blown crisis in the country.

With volatility on the rise, some investors are taking steps to guard their portfolios against further currency swings.

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The implied volatility used by banks to price three-month options on the euro against the dollar, on Wednesday stood at its highest level since March, indicating greater demand for hedges against increased gyrations in the currency pair. Demand for some options that would protect against gyrations in the dollar-yen currency pair are at their highest in a year.

Bernhard Eschweiler, economic advisor at QCAM Currency Asset Management, is betting the dollar will continue rising but has also recommended investors use derivatives that could counterbalance gyrations in the currency markets. Worsening inflation, COVID-19 flare ups and an intensifying energy shortage are among the factors that could give markets a jolt, he said.

“There is no shortage of potential shocks,” he said.

Foreign exchange volatility tends to pick up when the Fed gets closer to hiking rates, said Bipan Rai, North America head of FX strategy at CIBC Capital Markets.

“If you are an asset manager with exposure in major currencies that could diverge due to what the Fed will be doing next you, then you will want to have some protection in place,” he said.

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(Reporting by Saqib Iqbal Ahmed and Gertrude Chavez-Dreyfuss; Editing by Ira Iosebashvili and Edward Tobin)

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Arnault-backed group launches second SPAC listing

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December 7, 2021

By Emma-Victoria Farr

LONDON (Reuters) – France’s richest man Bernard Arnault and former UniCredit head Jean Pierre Mustier will publicly list a second blank cheque vehicle in Amsterdam, raising 200 million euros ($226 million), the bookrunners on the deal said.

Earlier this year, the duo raised half a billion euros from their special purpose acquisition company (SPAC), Pegasus Acquisition Company Europe B.V., which is searching for takeover targets in the financial sector.

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On Tuesday, the same group of backers announced they would list a second vehicle with a similar focus, Pegasus Entrepreneurial Acquisition Company Europe, in Amsterdam.

SPACs are listed on a stock exchange by a group of entrepreneurs, who use the money raised to target a private company – allowing the target to get a stock market listing without the arduous process of launching a public listing.

Mustier is working with former Bank of America banker Diego De Giorgi and entrepreneur and investor Pierre Cuilleret in launching the 200 million euro listing.

Several SPACs have listed in Amsterdam, potentially boosting the Dutch financial capital’s credentials as a hub for fast-growing companies. London has only hosted one major SPAC in 2021, after updating its rules to make them easier.

Pegasus is backed by institutional sponsors Tikehau Capital and Financière Agache and by sponsors De Giorgi, Cuilleret and Mustier. Citi, Goldman Sachs and BNP Paribas are the bookrunners on the deal.

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($1 = 0.8860 euros)

(Reporting by Emma-Victoria Farr; editing by John O’Donnell and Louise Heavens)

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Bulls back in charge as Omicron worries wane

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December 7, 2021

By Marc Jones

LONDON (Reuters) – Waning Omicron COVID-19 variant worries and a timely booster shot of Chinese stimulus lifted world stock markets and oil on Tuesday and left traders offloading safe-haven currencies and bonds again.

The FTSEurofirst 300 index was on track for its first back-to-back run of plus 1% gains since February while Asia saw record bounces from some of China’s biggest firms such as Alibaba and Baidu. [.SS][.EU]

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The risk-on mood also helped the dollar climb against safe haven currencies such as the Japanese yen,, which had lost 0.6% overnight, as the confidence-sensitive Australian dollar also found buyers. [FRX/]

Safe-harbour government bonds went the other way with yields – which move inverse to bond prices – up 2.5% on Germany’s benchmark 10-year Bund after falling to a three-month low on Monday. [GVD/EUR]

Reports in South Africa said Omicron cases there had only shown mild symptoms and the top U.S. infectious disease official, Anthony Fauci, told CNN “it does not look like there’s a great degree of severity” so far.

“Good news relating to the severity of Omicron should be taken with a pinch of salt. Faster transmission could offset the benefits of milder symptoms,” researchers at ING said in a note. “More broadly, it is still early days, even if markets are starting to display Omicron fatigue.”

The gains also came after China’s central bank on Monday injected its second shot of stimulus since July by cutting the amount of cash that banks must hold in reserve.

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There was still uncertainty about its property sector as Evergrande teetered on the brink of default again but data showing much stronger import growth was “a positive sign on the strength of domestic demand”, RBC analyst Adam Cole said.

Elsewhere, Australia’s S&P/ASX200 rose 0.95%, while Japan’s Nikkei advanced 2.1% as risk-on sentiment pushed markets higher.

MSCI’s main Asia ex-Japan benchmark has lost about 5% so far this year, with Hong Kong markets figuring among the big losers, while Indian and Taiwan stocks outperformed.

Shares in embattled developer Evergrande edged up 1.7% after hitting a record low on Monday as markets waited to see if the real estate giant has paid $82.5 million with a 30-day grace period coming to an end.

Elsewhere, markets were supported by gains on Wall Street, where economically sensitive stocks outperformed.

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“While epidemiologists have rightly warned against premature conclusions on Omicron, markets arguably surmised that last week’s brutal sell-off ought to have been milder,” Vishnu Varathan, head of economics and strategy at Mizuho Bank, said in a note.

“After all, early assessments of Omicron cases have been declared mild, spurring half-full relief.”

Also supporting the dollar in FX markets was the expectation the Federal Reserve will accelerate the tapering of its bond-buying programme when it meets next week in response to a tightening labour market.

Oil prices jumped another 2% to $74.60 a barrel, adding to a near 5% rebound the day before as concerns about the impact of Omicron on global fuel demand eased. [O/R]

Copper prices also ticked higher while gold was steady at $1,778.5 per ounce on expectations U.S. consumer price data due later this week will show inflation quickening.

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(Additional reporting by Anshuman Daga in Singapore; Editing by Nick Macfie)

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Exclusive: EU antitrust regulator seeks input on Microsoft’s $16 billion Nuance deal

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December 7, 2021

By Paresh Dave

(Reuters) – EU’s antitrust regulator is taking a deeper look into Microsoft Corp’s $16 billion deal for transcription technology company Nuance Communications Inc, asking customers and competitors to draw up a list of concerns, according to a questionnaire from last month seen by Reuters.

The previously unreported outreach is the most extensive by an antitrust authority since the companies announced the acquisition in April, according to a person familiar with the matter.

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Microsoft declined to comment, and Nuance did not respond to a request for comment.

After minimal review, the U.S. Department of Justice in June and the Australian Competition Commission in October said they would not contest the deal. The companies filed for approval from the European Commission’s competition bureau last month, and the regulator has until Dec. 21 to clear the deal or open a bigger investigation.

The companies had expected to close the deal by the end of this year, but said last month the timeline could slip to early next year.

The questionnaire asks whether Microsoft and Nuance are competitors and whether a tie-up could affect clients and rivals, including whether Microsoft could favor Nuance over competing services.

Nuance primarily sells transcription technology that is popular among doctors and call centers that want to automate note-talking. Analysts view the deal as bolstering Microsoft’s presence in the healthcare market, and bringing it new voice and medical data to train artificial intelligence offerings in health, speech and biometric security.

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Like other big tech companies, Microsoft for years has grown its business through acquisitions, such as in advertising and video gaming. But in the last decade, Microsoft has avoided the target that recently has dogged its competitors Alphabet Inc’s Google, Facebook Inc, Apple Inc and Amazon.com Inc, all of which are facing antitrust lawsuits and investigations on numerous issues.

Steven Weber, a University of California Berkeley professor studying the intersection of technology and health care, said possible concerns about the pending deal could include Microsoft forcing its Office suite on Nuance customers by bundling them together.

Nuance has said it serves 77% of U.S. hospitals.

A key to its success has been has ensuring in deals with customers that it could use their data to advance its voice recognition systems, according to former chief executive Paul Ricci and another former employee.

For instance, a Nuance contract with Augusta University Medical Center, obtained by Reuters this year through a public records request, reads, “Customer shall provide Nuance access to voice and text data…and grants Nuance a perpetual, royalty-free license to copy, use and analyze such data for speech recognition research.”

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Big cloud vendors such as Amazon and Microsoft typically do not have unfettered access to customers’ data for research and development. But the opportunity to acquire those relationships and data explains Microsoft’s interest in Nuance, the former employees said.

Other providers of health transcription technologies include 3M Co and Philips.

(Reporting by Paresh Dave; Editing by Kenneth Li and David Gregorio)

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