Apr 12, 2019

Currency markets have been eerily calm for 6 months

Dion Rabouin, author of Markets
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Data: Cambridge Global Payments; Chart: Axios Visuals

Currency markets have been remarkably placid over the past few months, with implied volatility levels near all-time lows.

Where it stands: Since late last October trends have vanished from the FX markets, Joseph Trevesani, senior analyst at FX Street, writes in a note to clients, "There seems to be a new law of foreign exchange markets: Every sustained movement will be met by an equal and opposite reversal."

The intrigue: Between the end of October and the beginning of March, the euro traded in a range against the dollar of just 3 cents, from 1.15 to 1.12, Trevesani notes. The range has contracted to 1.12 to 1.14 since. The British pound has been in much the same boat. On Nov. 1, it closed at $1.302 against the dollar and was at $1.307 late Thursday.

  • The Japanese yen, Swiss franc and Australian and New Zealand dollars have all shown much the same patterns.

What it means: Karl Schamotta, chief market strategist at Cambridge Global Payments, tells Axios in an email that the low volatility is the result of traders having zero fear of currencies either rising or falling unexpectedly to any significant degree.

  • "Tail risks on both ends of the spectrum have been mitigated — on the downside, by central banks expressing a willingness to step in to support markets, and on the upside by continued weakness across a major swath of the global economy."
  • "This is a situation in which an exogenous catalyst could easily shift market expectations enough to touch off a new round of volatility in currencies. Stability creates instability, as Minsky would say."

Go deeper: Extreme global debt is rewriting the rules of economics

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