Sleepy FX markets are a sign of complacency, investors warn
Hedging
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.
