WASHINGTON – The longest US government shutdown in record is consigning currency traders to their worst year in decades as a dearth of economic data clouds the outlook for the dollar.
Foreign-exchange investors are on course for the poorest annual performance since 2005, according to a BarclayHedge index. The pinch was already being felt on Wall Street before the data vacuum, with Goldman Sachs Group, Morgan Stanley and Bank of New York Mellon among those reporting a drop in currency trading revenues last quarter.
Amid the federal shutdown, crucial economic and market positioning statistics have not been published in weeks. That’s made traders less willing to stake big bets on where the dollar is headed, computer-driven quantitative funds have less high-quality data to run on, and strategists have been delaying updating their forecasts.
As a result, foreign exchange volatility has fallen well below long-term averages – a far cry from the wild swings sparked by US President Donald Trump’s global tariff announcement in April.
“It’s shaping up to be a poor year overall for foreign-exchange investors,” Mr Shaun Osborne, Scotiabank’s chief currency strategist, wrote this week citing the BarclayHedge index, which tracks 25 currency programmes trading foreign-exchange futures and cash forwards.
“Weak returns overall this year may have consequences for markets in the months ahead,” he added, should traders turn “more reluctant to boost risk positioning if weak returns persist”.
The absence of key data comes after an already challenging period for currency traders. Amid the tariff-fuelled chaos, several long-standing correlations broke down, and the market became driven by harder-to-track money flows and changes to hedging strategies.
It’s left many investors running smaller positions and taking a more cautious approach, with a gauge of confidence in the future path of the world’s most traded currency pair, the euro-dollar, pointing close to a record-low year.
Private data sources such as proprietary measures of flow, as well as indicators from outlets including ADP Research and ISM, are playing a much more important role.
“We’re having to lean more heavily on alternative data sources,” said Ms Lauren van Biljon, senior portfolio manager at Allspring Global Investments. “With the year as a whole having been so noisy, and so reactionary, it’s paid to run with a higher number of smaller active risk positions than anything too chunky.”
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.
As foreign-exchange gyrations subside, big companies are less likely to rush to protect positions. There is also less scope for opportunistic asset managers and hedge funds to profit on exchange-rate fluctuations.
All of this translates to lower revenue.
“Volatility and themes and narratives all move up and down together,” Mr Brent Donnelly, the president of Spectra Markets and a former bank currency trader, said.
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 5 per cent year-over-year in the third quarter.
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.
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 (S$12.5 trillion) foreign-exchange market.
Ms 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.
“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,” Ms Foley said. “It’s hard to change forecasts on your gut feeling without proper data to back that up.”
Mr 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.
“When you have a giant gap of US 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.”
Still, the shutdown is costing the US economy about US$15 billion a week and pressure is ramping up for the stalemate to be resolved. If and when that comes, foreign-exchange volatility could resurge.
“The lack of official US data has created a void with clients perhaps over reliant on corporate and private data,” said Mr Chris Callander, head of FX trading for Europe at Societe Generale.
“The market may get a reality check when the US reopens.” BLOOMBERG
