Ben Bernanke’s efforts to provide better communication to markets have backfired as investors speculating on the Federal Reserve chairman’s plans to taper bond buying have driven volatility higher, according to Alan Ruskin of Deutsche Bank AG.
“We want to know a lot in terms of clarity, what are the data parameters behind this? When you taper, how do you taper?” Ruskin, global head of Group of 10 foreign-exchange strategy in New York at Deutsche Bank, said on Bloomberg Television’s “Surveillance” with Tom Keene and Scarlet Fu.
The Fed’s “transparency isn’t actually working terribly well. It’s actually engendering market volatility.”
JPMorgan Chase & Co.’s G-7 Volatility Index jumped 17 percent in May, after reaching a more than five-year low in December. That rise has helped stifle gains in the carry trade, which involves borrowing in low-interest-rate currencies to buy higher-yielding assets.
Deutsche Bank’s G-10 FX Carry Basket index fell 3.3 percent last month, the biggest decline since May 2012. The measure had increased for three straight quarters through March. Higher volatility undermines the strategy because the risk in such trades is that market moves will erase profits.
Fed policy makers next meet on June 18-19 after Bernanke said on May 22 the central bank could reduce its monthly purchases of $45 billion of Treasurys and $40 billion of mortgage-backed securities, known as quantitative easing, if the employment outlook shows sustainable improvement. Stimulus tends to debase the currency.
A Bloomberg survey of 59 economists estimates the central bank will reduce its buying to $65 billion a month at its Oct. 29-30 meeting.
“People perceive the idea that the Fed is itching really to remove QE, not really because the data has changed, but because the costs related to QE are seen as too high to bear at this point,” Ruskin said. “What the marketplace wants is certainty.”
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