Fixed Income Research & Macro Strategy (FIRMS) from Olivier Desbarres at 4X Global Research 27 February 2018
- Equity market volatility, both implied and realized, which peaked in early February has eased off in the past fortnight but is still high when compared with the past 12 months.
- By comparison, realized volatility in most currency markets did not rise as much in recent weeks and is broadly in line with its short and long-term averages.
- Of course modest currency volatility at a global level masks variations in volatility among individual currency pairs, with volatility unsurprisingly higher in high-yielding emerging market currency pairs versus the Dollar, but also USD/KRW and USD/PLN.
- However, volatility has recently been subdued in most currency pairs, and in particular Asian currencies, at the lower end of its range (including USD/BRL) or both for Sterling.
- Low volatility in Asian currency pairs should perhaps come as no surprise given Asian central banks’ ability and willingness to actively manage their currencies, both verbally and via intervention in the FX market.
- Nevertheless, a dearth in the past 20 months of clear-cut FX market-moving data or developments has also held back volatility in major currencies, including Sterling and Euro crosses – in contrast to the three distinct currency shocks in early 2015-mid-2016.
- Moreover, some of the more acute geopolitical risks, including tensions between North and South Korea, have recently subsided while global GDP growth continues to inch higher.
- Sterling is displaying little volatility around a slow upward trend as the Bank of England gears up to a May rate hike but volatility is more likely to rise than fall as negotiations between the UK and EU intensify in the run-up to parliamentary votes in late-2018.
- While we remain bullish the Euro medium-term, we are more confident in predicting higher volatility than Euro appreciation in coming weeks due to a heavy political calendar, including the SPD members’ vote in Germany and Italian general elections on 4th March.
- In the US, we do not think that Fed Chairperson Powell will use forthcoming Congressional testimonies to markedly deviate from the Fed’s current message of three hikes in 2018.
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