Sleepy FX markets are a sign of complacency, investors warn
costs for foreign exchange swings across the world's 10 most-traded
currencies have dropped in recent weeks, causing market watchers to warn
of investor complacency and to encourage the buying of protection
against future volatility.To get more news about WikiFX, you can visit wikifx.com official website.
Implied volatility - which measures the cost of buying options to protect against FX moves - across the 'G10' group of currencies has fallen on aggregate in recent weeks, implying that traders expect currencies to be calm in the months ahead.
Deutsche Bank (DE:DBKGn)'s currency volatility index, which shows an average of 3-month implied volatility for the major currency pairs has fallen to its lowest since July 2020.
Meanwhile, JP Morgan's G7 currency volatility index has hit lows not seen since March 2020, when a selloff in global markets drove a dash for dollars.
The drop in these gauges reflects a broader phenomenon across financial markets - the suppression of volatility by central banks that have eased monetary policy to unprecedented levels to cushion against the economic devastation wrought by the pandemic.
However, as vaccine rollouts allow economies to reopen and inflation expectations rise, some central banks, including the Bank of Canada and the Bank of England, have begun to taper asset purchase programmes. Others such as the U.S. Federal Reserve have hinted there will be an end to such easy money, even if not yet.Typically, shifts in central bank policy spark increased volatility in currencies as investors price in diverging monetary policies between countries.