Volatility in Currencies Worldwide Slumps to Lowest Level Ever

(Bloomberg) — Stocks may be grabbing most of the headlines, but equities aren’t the only asset class in uncharted territory.

Global currency volatility has dropped to the lowest level ever recorded. Less than 48 hours after the U.S. and China put pen to paper on a trade deal that reaffirmed an agreement not to devalue their currencies, the JPMorgan (NYSE:) Global FX Volatility Index — which tracks the options market to measure expected price swings — is trading lower than at any point since it was created almost three decades ago.

The milestone is a culmination of a multi-year trend toward calmer currency markets, one which accelerated last year as central banks shifted to easier monetary policies in a bid to shore up growth. It’s also a phenomenon on display across major asset classes, where the resultant abundant liquidity has stoked valuations and suppressed price swings.

“The signing of the phase one trade deal has led investors to assume that a negative threat to global growth has been removed,” said Jane Foley, head of FX strategy at Rabobank. The risk of such unprecedented low volatility “is that investors start to behave as if high-risk assets such as stocks can never go down. This would be classic bubble behavior,” she said.

The impact of the trade-deal signing on currency markets is clearly on show in the implied volatility of the dollar-yuan currency pair: In the offshore market it’s near the lowest since China’s surprise devaluation in 2015. The day of the signing also saw the JPMorgan G7 Volatility Index close at its record low.

READ  Short-term yields spike, all eyes on RBI

Currency calm can be a good sign for many market players and economy watchers — foreign-exchange turmoil often coincides with stress between nations, unstable monetary trajectories or diverging growth. But there is such a thing as too much calm, according to Ulrich Leuchtmann, head of currency strategy at Commerzbank AG (DE:).

“FX markets have to produce at least so much volatility that shifts in fundamentals can be properly reflected,” he said. “My gut feeling is we are at the lower end of what’s possible before the FX market loses its ability to reflect fundamentals.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Please enter your comment!
Please enter your name here