The Swiss franc and Norwegian crowns both gained after central bank meetings on Thursday, their moves a reflection of the greater volatility and activity that has begun to return to currency markets after a slack year. The dollar, whose surge since July is at the heart of a broad rise in volumes across major currency pairs, jumped another 1.5 percent against the yen after the Federal Reserve sent another shock through the financial system by raising its projections on future interest rates.
The dollar trimmed some of those gains in morning trade in Europe but many dealers and analysts now read the Fed as confident it is on the path back towards rises in interest rates that would put an end to an era of universally low borrowing costs in the developed world and fund a multi-year rally for the greenback. The past month has also brought a surge in event risk and other opportunities for traders, ranging from Scotland's referendum on independence to surprise action from the European Central Bank on interest rates and resulting pressure on others like the Swiss National Bank to act.
"There is a lot going on and that is generating a lot of moves in the market and a lot of volume too," said Ian Stannard, head of European currency strategy at Morgan Stanley in London. "In terms of events it has been one of the busiest weeks we've had in a long time." The volatility implied by currency options contracts for months has been nailed to levels as low as 4 percent that leaves foreign exchange dealers struggling to meet targets on returns and puts pressure on the business models of retail brokers.
On Thursday on the yen, one month vol had recovered to more than 7 percent, on the euro to 6.4 and on sterling more than 8 percent. The Norwegian crown was the biggest gainer, up more than 1 percent against both the euro and the dollar after Norges Bank raised its forecasts for both growth and inflation next year and said it no longer saw downside risks to its forecast that interest rates would stay on hold until 2016.
It had previously said there was some risk of a cut. "Norges Bank was clearly more hawkish than expected, raising the short-term rate path and only lowering the long-term rate path marginally," Danske Bank said in a note to clients after the announcement. "Fundamentally, we remain bullish on NOK on relative growth expectations and carry. We forecast it at 8.10 against the euro in one month, 7.95 in six months and 7.75 in a year."
The franc gained around 0.3 percent against the dollar and edged back towards the 1.20 franc per euro cap the Swiss National Bank has held against the euro for the past three years. With the euro at its weakest against the dollar in a year, there had been some speculation that the central bank might tweak its policy message or even take more action. Instead, there was nothing new in the bank's statement for those players.
Sterling made more progress against the dollar and edged towards its highest in two months against the euro, the result of growing conviction in the market that a "No" vote will prevail in Thursday's Scottish referendum, heading off the threat of a shock to the UK political and financial status quo. The vote still looks very close and implied overnight volatility doubled on the options market to just under 35 percent on Thursday, almost 10 times levels seen a month ago. But that may reflect just as much expectations the pound will rebound sharply in the event of a "No" vote as fears of the market turmoil that could follow a "Yes".
Many London dealing rooms are expected to be staffed through the night as the results, expected in the early hours of Friday morning, begin to trickle in. "We just have to wait for the results now," said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi UFJ in London. "If the polls are right then sterling should rebound tomorrow morning."