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NEW YORK/LONDON, Sept 27 (Reuters) – Trading in tumultuous foreign exchange markets is akin to being in a casino right now, according to some traders navigating markets that have been whipsawed as central banks and governments try to right their economies.

In the last week, sleep-deprived traders have worked flat-out advising clients on the markets’ extraordinary moves: the crash of Britain’s pound to an all-time low, the Japanese monetary intervention to prop up the falling yen, and the euro’s deeper plunge below dollar parity.

Towering above all is the mighty US dollar which is trading at a two-decade peak. Some see no end to the wrenching volatility.

“It really is like a casino right now,” said John Doyle, vice president of dealing and trading at Monex USA, who said he is being more hands-on in talking to clients and extra cautious about risk.

“We have had to be extra vigilant of our internal trading policies to ensure we are not taking any undue risks,” said Doyle. “Discipline has been key.”

Deutsche Bank’s Currency Volatility Index .DBCVIX – the historical volatility index of the major G7 currencies – jumped to a two-and-a-half year high of 13.55 on Monday.

The British pound fell about 5% against the dollar over the last two sessions, its worst 2-session drop since March 2020, drawing comparisons with the typically more volatile emerging market currencies.

The yen remains near a 24-year low against the greenback, despite Japanese monetary authorities last week intervening in the foreign exchange markets to boost the battered currency for the first time since 1998.

While Sterling and the yen have fared extremely poorly against the dollar, the greenback’s meteoric rise has spared no major currency. Every G10 currency has slipped against the dollar this year, for an average fall of about 16%.

“It’s been a hectic few days for sure, and sleep has been sorely lacking,” said Michael Brown, head of market intelligence at payments firm Caxton in London. “I’ll blame sterling rather than my coffee habit for that, but heading to bed at 11:30 and waking at around 3:30 to cable (the US-Sterling rate) hitting record lows certainly wasn’t much fun.”

Moves have surprised long-time currency traders and investors.

Akshay Kamboj, co-chief investment officer at Crawford Ventures, a hedge fund trading currencies said while he had been expecting a deep correction in sterling “this deep was not anticipated.”

“Our team is working around the clock from multiple global locations,” said Kamboj, adding he is not trading sterling because the pound’s direction now depends entirely on how the Bank of England reacts.

VOLATILITY HERE TO STAY

The volatility is unlikely to stop.

“It does feel like the groundwork is still there for more disorderly moves,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets, who added the driver would be dollar strength which is dependent on how hawkish the US Federal Reserve is in raising rates.

The US dollar has dominated due to soaring US interest rates, a comparatively strong American economy and demand for a haven as global financial markets have turned more turbulent this year.

That has exacerbated problems around the world.

With the yen weighed down by the ever-widening gap between the yields on US and Japanese government debt, the euro hurt by worries over an energy crisis and its impact on the economy, and the pound slammed by concerns the new government’s economic plan will stretch Britain’s finances to the limit, dollar bulls have been quick to press their advantage.

While FX traders are no stranger to volatility, the confluence of various risks makes this moment stand out.

Unlike March 2020, the last period of heightened volatility, where policymakers were united and had largely similar responses to the pandemic, traders now are faced with central banks reacting in their own different ways as they deal with soaring inflation and currency weakness.

“In previous times it’s been a macro economic story, but this is very much a central bank story with them all jostling over rate hikes,” said Chris Huddleston, CEO at FXD Capital, who has been former FX and bonds trader for the past 20 years.

Meanwhile the dollar’s continued strength bodes ill for global financial markets analysts at Morgan Stanley said in a note on Monday.

“Such U.S. dollar strength has historically led to some kind of financial/economic crisis … If there was ever a time to be on the lookout for something to break, this would be it,” the analysts said.

 

(Reporting by Saqib Iqbal Ahmed, Carolina Mandl, John McCrank in New York and Dhara Ranasinghe in London, writing by Megan Davies; Editing by Aurora Ellis)

Sept 27 (Reuters) – China’s not trying too hard to correct the yuan’s depreciation versus the U.S. dollar, perhaps knowing it’s a losing battle due to external and domestic factors. Nonetheless, bullish bets on the yuan might soon make sense.

China on Monday announced a return of a 20% reserve requirement ratio on FX forwards, making it more expensive to short the yuan. The effect was barely noticeable as USD/CNY ripped back up after a brief dip. The pair is now close to notching a new 27-month high above 7.1690.

The People’s Bank of China has been consistently guiding the daily yuan midpoint stronger than most estimates, but it hasn’t managed to shift bearish sentiment, which might explain the reinstating of the FX RRR. Tuesday’s USD/CNY fix was again below forecasts but not as low as some adjusted estimates; the PBOC also injected the most short-term liquidity since February .

But that doesn’t alter the outlook for the renminbi; maybe nothing will, except a change in Beijing’s zero-COVID policy.

The World Bank on Tuesday slashed its 2022 forecast for China’s economic growth to 2.8% from its April estimate of 5.0%, and sees the behemoth burdening the region .

As economic data signals further slowing and youth unemployment threatens to sow social unrest , reopening China’s borders to revive consumption and the services sector would make sense. If this happens before the scheduled F1 race in Shanghai in April, yuan bears might be forced to reconsider.

 

(Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai)

NEW YORK, Sept 26 (Reuters) – Some investors are growing concerned the dollar’s meteoric rise is setting the stage for a rapid reversal, which would bruise those who have sought refuge in the US currency in recent months.

Soaring US interest rates, a comparatively strong American economy and demand for a haven from wild gyrations in asset prices have lured investors to the dollar, driving it up about 22% against a basket of currencies in the past year.

Some investors worry the dollar trade has become excessively crowded, raising the risk of a sharp unwind if the case for owning the currency changes and investors try to exit their positions all at once.

“Positioning is crowded,” said Calvin Tse, head of global macro strategy, Americas, at BNP Paribas. “If we get a catalyst, the dollar can turn, and turn very aggressively,” he said.

International Monetary Market speculators held a net long US dollar position of USD 10.23 billion for the week ended Sept. 20. That is lower than a recent high of nearly USD 20 billion in July but marks the third-longest streak since 1999 in traders holding bullish positions on the greenback, with 62 straight weeks of long positioning.

Barring a brief period of peak pandemic-related uncertainty, broad net options positioning data going back to 2014 shows US dollar long positions are the most stretched ever, according to Morgan Stanley.

Some 56% of participants in BofA’s global fund manager survey in September named being long the dollar as the most “crowded trade,” the third straight month the greenback has held that position in the survey.

Investors may have already had a taste of what a reversal could look like when the dollar index retreated nearly 3% over the course of two weeks, starting in mid-July, as some investors bet US inflation might be set to moderate enough to allow the Fed room to pivot away from its path of aggressive interest rate hikes.

While a hotter-than-expected US inflation report in August dashed those hopes and sent the dollar higher, the dangers stemming from the crowded dollar trade have only grown, investors said.

“Undoubtedly, when you have a crowded trade, where you have investors all seeking the same thing, when perceptions do change, the reaction is a violent one,” said Eric Leve, chief investment officer at wealth and investment management firm Bailard.

“We could easily see a 10%-15% move the other way in the dollar vs euro or yen,” he said.

In 2015 and 2009, the last two instances when the dollar index rose more than 20% during a one-year period, the index subsequently logged a two-month drop of 6.7% and 7.7%, respectively, once the greenback peaked.

REVERSAL CATALYST

While crowded positioning can aggravate any potential reversal for the dollar, it would take a big fundamental change to cause that reversal, investors said.

Falling US interest rate volatility, normalizing European energy prices and China abandoning its zero-COVID policy are three prerequisites for the dollar to enter into a structural bear market, BNP’s Tse said.

“When those three are all checked off, it provides us more of a runway to see the dollar enter a bear market, but I don’t see these happening any time soon,” he said.

While US interest rates are above those in many other economies, almost every major central bank, including the European Central Bank and the Bank of England, has hiked rates as they step up their fight against high inflation, helping boost the allure of their battered currencies.

Any signs that US inflation could be easing might help revive expectations for a dovish pivot by the Fed, robbing the greenback of a crucial driving force.

A serious blow to the US economic outlook could also hurt the dollar, said Jack McIntyre, a portfolio manager at Brandywine Global.

The Fed’s aggressive policy tightening has boosted worries that the US economy could be headed for a recession next year.

The world’s three largest economies – the United States, China, and the euro zone – have been slowing sharply, and even a “moderate hit to the global economy over the next year could tip it into recession,” the World Bank said in a recent study.

“I think what weakens the dollar is increasing likelihood that the US goes into a recession, and that is not discounted in the dollar,” McIntyre said.

But with the dollar scaling new multi-decade highs, positioning for a pullback can be painful. “We have been fighting it a little bit, but it’s tough,” McIntyre said.

 

(Reporting by Saqib Iqbal Ahmed; editing by Ira Iosebashvili, Megan Davies and Paul Simao)