HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today we will be looking at the currency markets with my guest Marc Chandler, who’s the chief currency strategist at Brown Brothers Harriman. Marc, thanks for coming back on the show.

Marc Chandler, chief currency strategist, Brown Brothers Harriman (Chandler): Thanks; always a pleasure.

Norman: I want to talk about the outlook right now. We’ve seen currencies really kind of go into a much narrower trading range, sort of volatility coming down. Do you see that persisting for any length of time? And by the way, it comes despite the recent QE3 announcement. And every time that happens, we hear people get very bearish on the dollar, but yet we’ve had a very tight range in a lot of these currencies. And some of that post-QE3 reaction has come back now.

Harriman: It’s amazing; the Brazilians are the ones who cry loudest about having currency worries, and yet since July, before even QE3 was even really thought about, the Brazil real against the dollar has been trading like 2 to 2.05. So 2 percent, 2.5 percent range is very small. So even if a trader gets it right, and they’re lucky to get half of the range, half of the big move, they still aren’t going to make much money. But I think you see this across the board.

Just at the end of last week we saw the lowest volatility we’ve seen since the crisis began with the euro and the yen. On one hand, part of me wants to say that the lower volatility is like a spring coiling. And it coils, coils and then there's a big move out. You tend to get big moves when you have low volatility, and you get smaller moves when you get high volatility implied in the market.

And so I suspect that we should be expecting some higher volatility. But so far it’s just not coming. Despite the events, despite QE, despite what Europe is doing and the deeper recession in Europe, there’s just nothing to shake us out of …

Norman: Maybe not despite QE, maybe because of QE. You talk about that coiled spring; what might have a very powerful restraint on that spring is the fact that with the Fed taking so much tail risk out of the system through their purchases of assets, doesn’t that reduce volatility? And if so, doesn’t it mean that as long as the Fed remains in play, in this regard, it’ll keep volatility low?

Harriman: I think if it was just the Fed, maybe not. But I think you’re right, that it’s not just the Fed, but you’ve got the ECB with their products in this outright market transaction ...