Global Stock Markets
The U.S. dollar’s unexpected surge over the past month is encouraging currency traders to pray for a return of lucrative but long-dormant price volatility on the main foreign exchanges, although early signs on that are strangely subdued.
Extra volatility - how much markets fluctuate up or down - opens up pricing gaps and anomalies that give traders more opportunities to make money, brokers more volume, and seeds greater demand for hedging services from multinational companies and cross-border investors.
But recent years have seen big currency swings evaporate as record-low interest rates converged towards zero and central bank money-printing weakened the cues exchange rates take from monetary policy trends and economic divergence.
That in turn has hammered profits at hedge funds and banks’ FX trading divisions, though some are asking whether the dollar’s blistering 5 percent rally since mid-April will mark a turn for vol, as known in market parlance.
So far there is little sign of this. Markets broadly look at two gauges of currency volatility — a daily swing in actual spot prices and an implied gauge derived from options markets on what traders expect volatility to be.
Three-month implied volatility EUR3MO= in the euro has completely unwound its February surge and is heading back below 6, levels not seen since 2014, while actual currency market swings remain comparatively elevated.
Realised moves in the euro remain elevated with daily volatility creeping up to around 5.5 and nearly doubling from the start of the year, a function of the dollar’s rally that has taken currency markets by surprise.
And there lies the rub. Despite the dollar’s rise, which has drawn comparisons with earlier cycles of a surging dollar and increased volatility in early 2015 and late 2016, traders remain sceptical this move signals the return to more volatile markets.
There are many in the market who say the recent dollar spike may be temporary, because it has been caused by speculators unwinding record bets against the greenback rather than a structural shift in the global economy.
What about volatility in other asset classes? U.S. Treasury bond volatility .MERMOVE is back towards record lows. In contrast, the S&P 500's .SPX volatility in the first 90 trading days of 2018 was the highest start to a year since 2009, while price swings of crude oil and metals are far higher than for the dollar.
Extra volatility - how much markets fluctuate up or down - opens up pricing gaps and anomalies that give traders more opportunities to make money, brokers more volume, and seeds greater demand for hedging services from multinational companies and cross-border investors.
But recent years have seen big currency swings evaporate as record-low interest rates converged towards zero and central bank money-printing weakened the cues exchange rates take from monetary policy trends and economic divergence.
That in turn has hammered profits at hedge funds and banks’ FX trading divisions, though some are asking whether the dollar’s blistering 5 percent rally since mid-April will mark a turn for vol, as known in market parlance.
So far there is little sign of this. Markets broadly look at two gauges of currency volatility — a daily swing in actual spot prices and an implied gauge derived from options markets on what traders expect volatility to be.
Three-month implied volatility EUR3MO= in the euro has completely unwound its February surge and is heading back below 6, levels not seen since 2014, while actual currency market swings remain comparatively elevated.
Realised moves in the euro remain elevated with daily volatility creeping up to around 5.5 and nearly doubling from the start of the year, a function of the dollar’s rally that has taken currency markets by surprise.
And there lies the rub. Despite the dollar’s rise, which has drawn comparisons with earlier cycles of a surging dollar and increased volatility in early 2015 and late 2016, traders remain sceptical this move signals the return to more volatile markets.
There are many in the market who say the recent dollar spike may be temporary, because it has been caused by speculators unwinding record bets against the greenback rather than a structural shift in the global economy.
What about volatility in other asset classes? U.S. Treasury bond volatility .MERMOVE is back towards record lows. In contrast, the S&P 500's .SPX volatility in the first 90 trading days of 2018 was the highest start to a year since 2009, while price swings of crude oil and metals are far higher than for the dollar.
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