Good Afternoon,

 Volatility Continues as Emerging Markets Feel the Pressure

Volatility seemed to be the theme of last week, with wild swings in equity prices leading to some interesting moves in the currency markets.  The VIX index, a popular volatility gauge has risen exponentially over the last three months culminating in a reading of 81.17 last Thursday. These levels are three to four times higher than the normal volatility range and are a sign of the historic times we are witnessing. Japans Nikkei portrayed this erratic behaviour perfectly, managing its biggest ever one day gain early in the week yet days later witnessing its second biggest one day fall.

The drama that has unfolded has been unrelenting in recent weeks. As banks and firms have stumbled, policymakers have in turn moved swiftly to plug the holes, hedge funds have scrambled for profits and investors have jumped on the back of sudden movements. Confidence has fallen to disastrous levels, which has added further fuel to the fire. The high volatility can in part be attributed to nervousness surrounding the economy at the moment. To borrow from author Philip Roth “Fear tends to manifest itself much more quickly than greed”. Whether or not this volatility is the beginning of a new trend or merely an unusual patch in the markets is yet to be seen.

This volatility is not isolated within equity markets as currencies have been ducking and diving recently also. Somewhat ironically, last week saw only moderate movements in major currencies. Dollar strengthened against its major pairings except for Sterling, which has finally found some support following the recapitalisation plans of the UK government.  Euros fortunes continued to dwindle amid confusion over the impact of European bailouts

The limelight was thrown to the emerging markets last week to provide the big moves. Many were hit hard as the crisis bites into demand for their exports, assets and in turn currencies. Those with over borrowed banking systems and large current account deficits have been particularly punished. The Hungarian Forint was battered badly, as was the South African Rand, Turkish Lira and Korean Won

Compounding this result is the recent collapse in commodity prices. The CRB index, a global benchmark of commodity prices dropped to four year low as the global economy looks firmly on course for a recession, and investors look to deleverage and move away from riskier currencies.

Looking ahead for the week a lot of the data will be UK based. The BOE minutes on Wednesday will be an interesting result as will Retail sales and GDP data later in the week.

Trade of the Week

With GBP/EUR pairing still at desirable levels for those buying Euros, the trade of the week is an option that locks in a worst case rate at 1.27. Clients will receive spot up until 1.37 at which point they are capped at this rate. This time horizon for this trade was 6 months and required no premium. For full details of this structure please contact one of our options traders on 0207 801 9050

Enjoy your week

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Please feel free to contact me (rick.roache@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:

Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.

Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.