Kim Hong-Ji/Reuters
Volatility has reawakened in the $5.1-trillion (U.S.) foreign-exchange market, as traders start to imagine life without ultra-easy monetary policy.
The impact is greatest in the currencies with most at stake from an end to years where stimulus only got more generous - the so-called high yielders. A gauge of expected swings in emerging-market currencies has surged above an equivalent measure for developed markets by the most since May.
European Central Bank President Mario Draghi this month downplayed the need for an expansion of quantitative easing, while speculation has grown that the Bank of Japan could scale back longer-term bond purchases. Traders see better-than-even odds of higher U.S. interest rates by year-end.
"The ECB refraining from extending QE, combined with the belief that the BOJ might be concerned that the yield curve is too flat, seemed to have behaved as a catalyst for yield curves to steepen globally," said Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA in London. "The impact of steepening has gone through risk, and the currencies which are most sensitive to risk have moved the most" and among Group-of-10 peers, that's higher-yielding ones such as the Australian, New Zealand and Canadian dollars, he said.
A yield curve is a graph showing yields on bonds of different maturities.
The South African rand and Mexican peso have been the worst-performing major currencies over the past month, with declines of at least 6 percent against the greenback. Australia's dollar has weakened 2.5 percent, the most among developed-market peers.
The Aussie rose 0.3 per cent to 74.93 U.S. cents as of 10:51 a.m. New York time after dropping as much as 0.3 per cent. The yen was little changed at 102.54 per dollar. The euro fluctuated at $1.1240.
A JPMorgan Chase & Co. index of three-month emerging-market currency volatility has climbed to 10.9 percent from 9.6 percent a week ago. The gap to the equivalent Group-of-Seven gauge widened to half a percentage point for the first time since May 27 after being negative for most of that period.
Expectations for swings in the Australian dollar against the greenback climbed to 11.5 per cent, from 10.3 per cent on Sept. 8. That was near the 19-month closing low of 10.1 per cent reached on Aug. 8.
The Dec. 14 Federal Open Market Committee decision has only just entered the three-month horizon. Futures put the odds of action at the meeting at 52 per cent, from 36 per cent at the start of August, based on data compiled by Bloomberg. The odds for higher rates following the Sept. 20-21 meeting are 18 per cent.
"In the run-up to the Fed decision, I do not think that you want to be long carry, either in G-10 or in the emerging-market space," said Stephen Gallo, London-based head of European currency strategy at BMO Capital Markets, in an interview on Bloomberg Television. "If the Fed does nothing next week, it is very likely that late September into early October should be good for yield and carry."