For currency traders, the U.S. shutdown is making a bad year worse

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What Bloomberg Strategists say…

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— Brendan Fagan, Macro Strategist, Markets Live

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The slump in big swings is bad news for major currency dealers in the business of making markets for investors and corporations and who generally benefit from higher transaction costs when prices are more volatile.

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As foreign-exchange gyrations subside, big companies are less likely to rush to protect positions. There’s also less scope for opportunistic asset managers and hedge funds to profit on exchange-rate fluctuations. All of this translates to lower revenue.

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“Volatility and themes and narratives all move up and down together,” Brent Donnelly, the president of Spectra Markets and a former bank currency trader, said.

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At Morgan Stanley, chief financial officer Sharon Yeshaya noted the slowdown in foreign-exchange trading last quarter on a call with analysts on Oct. 15. Goldman Sachs’ quarterly earnings presentation stated that net currency revenues were “significantly lower” than in the third quarter of 2024. And at BNY, FX revenue fell five per cent year-over-year in the third quarter.

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Spokespeople for Morgan Stanley and BNY declined to comment on the record for this article, while a representative from Goldman Sachs did not respond to a request for comment.

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‘In the Dark’

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The data void is also complicating the job of analysts tasked with tracking the ups and downs of the US$9.6 trillion-per-day foreign-exchange market.

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Jane Foley, the head of FX strategy at Rabobank, has been wavering on whether to reduce her forecast for euro-dollar next year. The likelihood that the market will pare euro long positions is part of her view, but she cannot gauge the extent to which this has happened without the weekly positioning data released by the Commodity Futures Trading Commission.

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“It’s difficult to be a forecaster anyway, you are always to some extent in the dark, but we are even more in the dark now,” Foley said. “It’s hard to change forecasts on your gut feeling without proper data to back that up.”

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Richard Cochinos, a currency strategist at RBC Capital Markets, says predicting foreign-exchange markets has always been like piecing together a “mosaic” of different data sources — that’s just become even harder in recent weeks.

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“When you have a giant gap of U.S. data, naturally you’re going to be slightly more cautious,” he said, adding that clients have turned more neutral on the greenback. “It’s very difficult to think aggressively either on the positive or negative side when it comes to the dollar.”

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Still, the shutdown is costing the U.S. economy about US$15 billion a week, airlines are starting to cut flights in response to staffing shortages, and pressure is ramping up for the stalemate to be resolved. If and when that comes, foreign-exchange volatility could resurge.

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“The lack of official U.S. data has created a void with clients perhaps over reliant on corporate and private data,” said Chris Callander, head of FX trading for Europe at Societe Generale. “The market may get a reality check when the U.S. reopens.”

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—With assistance from Vassilis Karamanis.

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