LONDON, April 4 (Reuters) – Traders and investors are looking to global interest rate cuts and a closely-fought U.S. election to drag the world’s currency markets from their deepest lull in almost four years.
Measures of historical and expected volatility – how much prices move over a set time period – have sunk in recent months with the world’s biggest central banks stuck in a holding pattern, depriving FX traders of the divergent moves between regional bond yields on which they thrive.
Deutsche Bank’s closely-followed implied currency volatility gauge is around its lowest in two years, and not far off pre-pandemic levels.
“The music isn’t playing in FX so far this year,” said Andreas Koenig, head of global FX at Amundi, Europe’s biggest asset manager. “U.S. (bond market) rates go up and down, but the others all follow, and therefore we have no change in differentials.”
“Who’s cutting first and how far…and then the U.S. elections, will be the FX events, the big macro events,” Koenig said.
Although U.S. yields have risen in recent days as investors reined in bets on Fed rate cuts after stronger-than-expected data, euro zone bond yields have largely followed suit.
“What would lead to any real volatility is increased differentiation among central banks,” said Samuel Zief, head of global FX strategy at JPMorgan Private Bank, although he said that’s unlikely in the first half of the year, with European and U.S. inflation following a broadly similar path.
TRUMP CARD
“Tariffs, extra tax, means the dollar could get stronger,” said Themos Fiotakis, global head of FX strategy at Barclays, adding that the euro and the Chinese yuan would likely suffer.
Trump and Joe Biden currently appear neck and neck, suggesting heightened volatility in the $7.5-trillion-a-day global currency market as opinion polls swing in the run up to November’s election.
Oliver Brennan, FX volatility strategist at BNP Paribas, said options, which let investors bet on currency prices, suggest traders are bracing for moves in the Mexican peso , Polish zloty and the yuan , all of which tumbled after Trump’s 2016 victory.
“Volatility in the 9-month to one-year range (for those three currencies) is really high, and because nothing is happening now, volatility is really low,” he said.
“If you look at any currency there is a kink around the November election, but the kink is huge in those three.”
NOT WORTH TRADING
For now, the volatility slump is limiting opportunities.
“Looking at our risk today, substantially less than the long-term average is allocated to currency,” said Jamie Niven, senior portfolio manager at Candriam.
That’s particularly true in certain currency pairs. “It’s not worth trading euro-sterling at the moment,” said Yusuke Miyairi, strategist at Nomura. Volatility in the pair is at its lowest since 2006 .
There are, however, signs rate moves are beginning to drive pockets of volatility.
Direct intervention by Japanese authorities to prop up their currency could provide another jolt.
In Europe, Switzerland’s rate cut helped the euro post its biggest quarterly gain on the franc since the common currency’s creation.
Meanwhile, investors are doing what they can.
He said low volatility also makes it cheaper to hedge an equity or bond portfolio.
For JPMorgan’s Zief, there have been worse times. “At least we have an environment where yes, it’s low volatility, but there are carry trades,” he said. “Low volatility with very low rates…is even worse.”
Sign up here.
Reporting by Harry Robertson and Alun John; Editing by Amanda Cooper and Kirsten Donovan
Our Standards: The Thomson Reuters Trust Principles.
