Forex focus: Sandy arrived and the markets went quiet

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There was a rare phenomenon last week, says Liz Phillips : calm during the storm.

As Hurricane Sandy smashed into the east coast of America last week causing floods, fire, devastation and deaths, the currency markets went quiet.

New York (Frankfurt: A0DKRK - news) is the world’s second biggest currency market second only to the UK. Currency trading never sleeps, it’s a 24-hour-a day worldwide market, dwarfing all the world’s stock markets combined. Yet for two days last week the unthinkable happened Wall Street shut up shop.

“While the US struggled with hurricane Sandy it seemed as though the rest of the market participants used this as an excuse to have the quietest month end we have seen in years,” says Chris Towner of HiFX . “October tends to be one of the more volatile months; however Sandy kept the market distracted from encouraging volatility.”

Given that the US dollar is a world currency, the lack of trading while New York was closed should have led to massive turbulence. Instead it was a damp squib.

“The lack of liquidity would have contributed to volatility if something unexpected had happened,” says Jeremy Cook of World First (Berlin: FC0.BE - news) , “but the storm hit on two of the quietest days of the data calendar this month. The traders who missed work because of the storm did not miss much.”

The impact on sterling versus the dollar was short-lived.

“The risk-nullifying effect of Superstorm Sandy sent the US Dollar spiralling higher against the pound by 1.2 cents,” says Josh Ferry Woodard of TorFX .

“However as the storm began to calm down, so did the currency markets and GBP/USD recommenced its turbulent ascent towards September 21’s high of 1.63.”

As flood waters subside, the impact of Superstorm Sandy could depress the dollar. “Longer term we would see the storm as USD negative, given the hit to GDP through the last three months of the year and the therefore perceived need for looser monetary policy going forward,” Cook adds.

Once US election fever has died down, attention will turn to how its debts are dealt with.

Will Poole of FC Exchange says: “Financial markets will likely focus more on the “fiscal cliff” where favourable Bush-era tax breaks come to an end this year in place of fierce spending cuts that genuinely threaten pushing the US back in to recession.”

Much of the ferocity of the hurricane had blown out by the time it reached the eastern seaboard of Canada. The Canadian dollar, nicknamed the loonie after the bird stamped on the one-dollar coin, has ridden out the global economic crisis better than most, but its buoyancy is on the wane. One Canadian dollar is now worth one American dollar.

John Goldie from Moneycorp says: “Since July, the Canadian dollar has been the currency in the ascendancy. However, over the past week we have actually seen parity restored between the American and Canadian dollars. This has been due to poor Canadian GDP figures, and the softening view that an interest rate hike is imminent, rather than the impact of Sandy. We can expect a prolonged period of weakness for the CAD (Milan: CAD.MI - news) unless economic conditions improve significantly.”

Robin Haynes of Currency Index adds: “The Canadian dollar reached its cheapest level against the pound since May last week due to weaker jobs data and reaction to American figures.”

The Canadian dollar, like other commodity currencies, such as the Australian and New Zealand dollars, has been boosted in the past by demand pushing prices higher for its oil and other commodities. Now the oil price is dropping and demand for raw materials is weakening.

Stephen Hughes of Currencies.co.uk believes this is about to change. “The Canadian dollar has weakened a little over the past couple of months from 1.55 to approximately 1.62. This might be the first sign that the rest of the world is catching up with those nations that rode the recession the best. Indeed, we have seen similar trends against the AUD and NZD recently.”

But it’s not a one-way bet that Canadian expats can expect improved exchange rates for their pounds.

Charles Purdy, managing director of Smart (Jakarta: SMAR.JK - news) Currency Exchange explains: “The Canadian dollar has been weakening recently as economic data has been less positive than hoped.

“However, it continues to trade in the fairly narrow range against sterling that it has traded in for the past two years.

“And it has to be remembered that the country’s finances are in much better health than the UK’s so it is difficult to see sterling appreciating much in the short to medium term.” Forex focus is sponsored by