The practice of borrowing in low-yielding currencies to take advantage of higher yields in others is not as common as it has been, with speculators opting out of risk rather than chasing growth as profits from the carry trade have fallen to levels not seen since 2011.
Bloomberg reported Monday that the JPMorgan Chase & Co. G7 Volatility Index has fallen to its lowest level in five years; the index had more than doubled in 2007–2008 before policymakers stepped in with drastic tactics to try to boost economic expansion. In addition, a UBS index tracking carry trade profits shows that they have dropped to 2011 levels.
Bloomberg said the slowdown was a sign the foreign exchange market is losing faith in central banks' ability to stimulate the economy.
The average daily foreign exchange volume for September was down 39% from its level a year ago, ICAP’s EBS trading platform indicated. Currency managers are having a tough time finding higher returns with volatility so much lower.
“At this stage it may feel frustrating, but waiting is not a bad strategy,” Mauricio Bouabci said in the report. Bouabci, a London-based currency fund manager at Pareto Investment Management, which oversees $45 billion, added that he would need to see higher volatility before he returns to the market.
Adrian McGowan, head of foreign-exchange forwards, options and trading in Europe at Barclays in London, said in the report, “Low volatility is something that participants haven’t felt comfortable with for a while.” He added that investors’ positions have not been “large … because there has been so much uncertainty.”
David Bloom, global head of currency strategy at HSBC Holdings in London, was quoted saying, “Carry had such beautiful, fantastic returns—so alluring, so attractive that I think people got hooked on it like a drug.” He added, “In today’s zero interest-rate policy world, peppered with unconventional policies, it is much more difficult and confusing.”