Low liquidity was one of the drivers behind some of the most volatile trading in the forex market this year, as the equities rout and the commodities sell-off fuelled big swings between major currency pairs and wreaked havoc in emerging markets.
The dollar was a big casualty from the moment the US session began, taking its cue from a 5.2 per cent plunge in the S&P 500 and a 1,000-point dive in the Dow Jones Industrial Average.
The greenback at one stage was down 2.8 per cent against the euro, restoring the single currency to $1.1711 - a level last hit in mid- January - before recovering to $1.1567.
As expectations of a September rate rise by the Federal Reserve receded, the dollar also dived against the yen - a favoured haven currency - by 3.8 per cent.
The euro also gained 1.5 per cent on sterling but picked up more significantly against a raft of emerging market (EM) currencies, the result of short positions in the single currency being unwound as market sentiment moved decisively risk-off.
Paul Lambert, at Insight Investment, said: “We are getting a taste of what the world feels like in the post-banking regulation world. There is no liquidity and we are finding air pockets everywhere.”
Emerging markets currencies resumed the sell-off that has been a forex feature since China’s rate policy shift two weeks ago, which caused the renminbi to devalue and raised alarms about its economy.
Bernd Berg, director of EM strategy at Société Générale, dubbed it an emerging markets crisis that had the potential to surpass the 1998 Asian crisis.
“We see panic selling in EM currencies due to global growth fears, mainly driven by the growth collapse in EM, the drop in commodity prices and uncertainty about the next Fed move,” he said.
“Panic selling is triggering a bloodbath among EM FX with many hitting new all- time lows.”
Alvin Tan, FX strategist at Société Générale, said lack of liquidity in August was exacerbating the moves but that illiquidity didn’t negate the seriousness of the sell-off.
“The trends are there, the sell-off is real. EM currencies have been weakening the whole year. It’s got worse in the last few weeks, but it’s part of that trend. Oil has been on a downward trend since the middle of last year. The big picture remains in place.”
The dollar index, a measure of the greenback against major currency partners, fell 1.9 per cent to a seven-month low. But Mr Tan cautioned against assuming the dollar was now trending weaker.
“The dollar is doing very well against EM currencies and commodity currencies, and on a trade-weighted basis it continues to advance,” he said.
The falling dollar also spells difficulties for the European Central Bank and the Bank of Japan, which needed a weak euro and a weak yen to stimulate growth.
“The BoJ is not going to be happy seeing dollar-yen at these levels, neither is the ECB [regarding euro-dollar levels],” said Mr Tan.
- Copyright The Financial Times Limited 2015
