Week of Powerful Volatility - Roundup

Phenomenal currency market volatility has dominated financial markets this week.  Key themes have been relative monetary policy stance, equity movement and perceived credit risk, with the most powerful battles on all fronts being played between the US and the Eurozone. 
 

Corresponding currency volatility should be no surprise though.  As it stands, it is reasonable that in a general, but admittedly lumpy, global economic recovery, relative growth and relative risk become central indicators. As uncertainty exists over where and how value-growth is going to be best achieved over coming years, with recent financial globalisation and technologisation having given such liquidity and such diversity for investments (in terms of currency base), it is unsurprising that jagged volatility should follow an upward curve.  As EUR/USD sears its way up and down by 100 ticks intraday, and with GBP/USD shuttling around 50 ticks here and there for fun, we must remind ourselves that these days neither give us the definition of gloom, nor the certainty of unilateral growth.
 

To give an example of the above – it is now granted that both the US and the EZ, as areas, are exhibiting signs of economic growth.  However, what is meant by ‘growth’ as a macroeconomic term in our current socio-economic framework?  Well, for one, growth is at the very least, the halting of money creation.  It is mathematically clear that, if a country has to produce denominations of value at an accelerated pace to be circulated both internally and externally, then its currency is not being used in the desired manner i.e. circulated at a relatively appropriate pace.  The UK then, on this front is not leading the pack – the reason why Sterling is still being sold hard is because there is still possibility that its real value will continue to decrease in future (the Bank of England this week refused to rule out further future Quantitative Easing), whereas, the EZ for example, despite all its credit problems, is at least not posing this prospect.  This however, posits the rest of our explanation: Monetary Policy is but one, albeit, powerful factor affecting currency volatility at the moment whereas perceived credit risk is another matter entirely (down the line they admittedly converge but we will leave this for now).  This is the Eurozone problem – some of its members pose a serious risk credit-wise.  The EUR thereby continues to be sold-down relatively steeply versus the Dollar which does not pose such risk on the same level.  However, turning to equity movements affecting currency and we see that any major uptick in equity markets leads to a Dollar sell-off – so we can assume that any resumption in sustainable global growth that isn’t just tied to the area of one major economic zone will lead to tension over use of the USD as a currency.
 

Now, the above may seem to be horribly confusing, but this may be the point.  Currency volatility at the moment is a reflection of trader and investor indecision, not only over relative growth in relation to nation-areas, but also over relative growth relating to particular financial instruments, which, by their very nature can lead into a whole variety of different denominations.  Globalisation and shifts in socio-economic behaviour are making this economic recovery, so far, potentially rather unlike any other.  It is not as simple as tying speculation on the economic performance of economic areas to direct currency performance at the moment.  UK GDP this morning is a good example – the figure was positive but the Pound was sold (GBP/USD moving for 1.52 and GBP/EUR 1.12).  Why is this?  Because Sterling performance is now much more complex and multifarious than statistics derived simply from the apparent real economy.