Fixed Income Research & Macro Strategy – 4X Global

  • Global FX volatility has fallen further in the past month to its lowest level since September 2014 according to our estimate (see Figure 1).

Global FX volatility has fallen to a five-year low

  • Volatility in most major currencies has either fallen or only increased marginally in the past month and is now very low relative to the past 12 months. Sterling, the Brazilian Real and Turkish Lira have recorded the largest absolute and relative falls in volatility.
  • There are a few exceptions. Volatility in the Chilean, Colombian and Mexican Peso, Kiwi Dollar and Philippines Peso has increased materially in past month. Chilean Peso volatility is now near its 12-month high but volatility in the Mexican and Colombian Peso and Kiwi Dollar is still well within its medium-term range. Philippines Peso volatility remains low.
  • There has been limited contagion from the collapse in the Chilean Peso to other Latam and high-yielding emerging market currencies and few major macro-data surprises.
  • Moreover, the perceived uncertainty surrounding major central banks’ rate cycles has receded in recent weeks with markets now assuming that central banks in the US, Canada, UK, Australia and New Zealand are unlikely to cut rates near-term.
  • However, the lack of tangible progress in US-China trade negotiations in the past week has seen the Renminbi NEER flat-line – as it did in the weeks following the US announcement on tariffs in early December 2018.
  • Sterling volatility has collapsed. The ruling Conservative Party remains about 15 points ahead of the Labour Party in opinion polls ahead of the 12th December general election. Markets seem reasonably confident that Prime Minister Johnson could secure a parliamentary majority and that a no-deal Brexit will be avoided.
  • But, as we argued in mid-July, the risk is that global FX volatility will rise in coming weeks, with the potential for a volatility spike in mid-December � a move markets may not be positioned for (see FX Vol gone AWOL, directionality has not, 19 July 2019).
  • First, there is scope for data-dependant central bank monetary policy to surprise, including in the United States. Moreover, the outlook for US-China trade negotiations remains at best opaque, with a number of possible scenarios on the table. This presents upside risks to USD/CNY and USD/Asia volatility in our view. Finally, if history has taught us one thing it is that British general elections are near impossible to predict with any accuracy.

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Ryan Littlestone

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