If you’re thinking currency markets have been a little dull this year, you’d be right. They’ve been undeniably boring. It shows the number of consecutive weeks where FX volatility has spent below the 20th percentile from 2002 until today. The 20th percentile refers to the bottom 20 per cent of results over this period.
It’s now been over 20 weeks since weekly volatility wasn’t in the bottom 20 per cent of results, indicating just how dull it’s been for currency traders.
In terms of duration, the current stretch of low volatility has only been surpassed on three occasions since 2002: before the GFC hit in 2008; before the Chinese announced a one-off devaluation in the Chinese yuan back in August 2015; and before the abrupt selloff in the financial markets that occurred late last year.
Based on recent history, when currency market volatility has been this low for this long, it’s been followed by a significant spike in volatility.
While no one knows the answer as to whether history will repeat, ANZ’s FX strategy team believes the risk of such a scenario is growing given mounting trade tensions between the United States and China.
“Since the last round of talks, when disagreements on the final text of the agreement arose, both sides have hardened their stance, and the likelihood of a resolution has diminished,” ANZ said in a note released on Thursday.
“This combination means that the hopes of recovery, which were underpinning market sentiment and liquidity, are looking fragile again.” Should concerns about the global economy lead to a decline in currency market liquidity, ANZ said the streak of low volatility could well come to an end.
Source: economictimes.indiatimes.com