Pedestrians walk under a board listing foreign currency rates against the Russian rouble outside an exchange office in central Moscow. The rouble extended its gains by more than 1 percentage point yesterday after the country’s central bank issued a statement saying it was planning extra measures to ensure financial stability.
Bloomberg
The fallout from the plunge in oil and high-yield debt prices is seeping into the $5.3tn-a-day foreign-exchange market, where the cost of trading has soared to the highest in more than a year.
The difference between the price at which traders are willing to buy and sell major currencies has widened in recent weeks to the most since 2013, rising above the six-year average of about 0.11%, according to JPMorgan Chase & Co Bid-ask spreads are expanding even as the trading volumes climb amid increasing financial-market volatility.
“There isn’t enough liquidity to support what people are trying to do, and that’s exiting markets” and protecting profits, Peter Gorra, the head of foreign-exchange trading in New York at BNP Paribas, said by phone on Tuesday. “Euro- dollar and dollar-yen, even for their depths and transparencies, are a bit jumpy at this point.”
Few, if any, markets are immune from the stress and volatility stemming from the collapse in energy prices and financial turmoil in Russia, where the rouble has tumbled 52% against the dollar this year. Currency volatility hasn’t been this high and liquidity this tight for 15 months, and they’re approaching levels reached when the Federal Reserve roiled markets by signalling it would eventually raise interest rates.
As the ruble sinks along with crude and high-yield debt, the differences between the highest prices buyers are willing to pay, and the lowest sellers are willing to accept, also widened for Norway’s krone, Colombia’s peso and even the euro versus the dollar, the world’s most-traded currency pair.
FXCM Inc, the third-largest currency broker for retail clients, said on Tuesday it would stop offering the ruble versus the dollar and begin closing its customers’ trades. Alpari UK stopped clients from taking new positions, while Saxo Bank and Gain Capital Holdings Inc’s Forex.com said they planned to demand a higher deposit from clients to deal in the currency.
“There are certainly signs that you can’t actively trade the rouble, and that has exaggerated Norway as a proxy trade,” Neil Staines, head of trading at ECU Group, a London-based money manager specialising in foreign exchange, said yesterday. “We are seeing” more weakness “than we’ve seen all year in terms of liquidity in the market right now,” he said.
JPMorgan’s Global Volatility Index has risen for nine straight days and touched 10.06% yesterday, the highest since September 2013. The average this year is 7.2%.
The pain may deepen if oil prices keep falling. John Normand, the London-based head of foreign exchange and international-rates strategy at JPMorgan, wrote in a report on Tuesday that if Brent crude-oil futures slumped to $50 a barrel, from $59.51 yesterday and this year’s high of $115.71 in June, then currency bid-ask spreads and market volatility may reach levels seen during the European debt crisis. The bid-ask spread for Colombia’s peso against the dollar increased to as much as 11.7 pesos this month. The gap for Norway’s currency rose to as high as 0.07 krone, the widest since January 2010. The euro-dollar spread rose to €0.0004, the most since February 2013, data compiled by Bloomberg show.
Bank of Russia, led by Governor Elvira Nabiullina, unexpectedly raised its key interest rates to 17% this week from 10.5% to try to stop the rouble from declining. The currency has plummeted against the dollar this year the most of 170 global counterparts tracked by Bloomberg.
Even with the rate increase, the rouble sank yesterday beyond 80 per dollar, a record low, before rallying after Economy Minister Alexei Ulyukayev denied speculation the government would turn to foreign-exchange restrictions to stop Russians from converting money into dollars.
The rouble was down 0.4% yesterday at 68.1542 per dollar as of 11:22am in London as Russia’s Finance Ministry announced it had bought the currency to stem the rout.
“Our traders are informing me that we see no bids to buy rubles,” Peter Mammarlund, chief emerging-markets strategist at SEB AB, said on Tuesday. “I thought 17% would give them at least a month of breathing space. We next have to look at the experience in 1998-1999. We are one big step closer to capital controls.”
Crude oil has plunged 44% this year as the Organization of Petroleum Exporting Countries sought to defend market share amid a US shale boom that’s exacerbating a global glut. The group, responsible for 40% of the world’s supply, will refrain from curbing output, the United Arab Emirates Energy Minister Suhail al-Mazrouei said December 14.
The impact of the oil rout may spread to even robust countries through a credit market. JPMorgan’s Normand said in the US high-yield credit market energy carried the largest weight, about 15%, of the JPM High Yield index. That’s twice its share of 10 years ago.
“One way to forecast FX bid-offers in an environment that is precarious, but also unprecedented, is to recognise that liquidity measures often correlate closely with credit spreads, and that credit spreads are currently moving in line with crude prices,” Normand wrote. “Credit spreads could flag a leverage problem which then becomes priced into” volatility, “or fixed-income could be most affected by liquidity constraints due to the new regulatory environment,” he wrote.
The extra yield investors demand to hold speculative-grade corporate bonds worldwide instead of benchmark US Treasuries rose to 5.92 percentage points, up from this year’s low of 3.59 percentage points in June and the most since 2012, according to Bank of America Merrill Lynch indexes.
