It might seem that the escalation of the trade war between the US and China, further uncertainty about brexit and the possibility of removing Prime Minister Theresa May from power or increasing tension in the Middle East will lead to an increase in the expected volatility on the main currency pairs. However, this is not happening, at least not as much as could be expected.
The expected volatility index for EUR / USD calculated by the CBOE exchange (EUVIX) has been systematically slipping since the summer of 2015, in order to reach the lowest level in at least a decade in April this year. In mid-April, the value of this index fell below 4 percent, and the main impact on its decline could have been the withdrawal of central banks from hawkish rhetoric. The US Federal Reserve has announced a pause in interest rate hikes, while the European Central Bank has postponed the possibility of starting normalization of monetary policy in time. From April to mid-May the volatility index for the euro increased to only 5.5 percent.
Chart: CBOE/CME FX Euro Volatility Index. Source: cboe.com
After changing the brexit date, volatility for GBP/USD plunged. The market ceased to expect large fluctuations in the British pound, and thus the index fell to the lowest level from 2014 to around 5 percent. We are currently observing a rebound of up to 8 percent, which in comparison with the earlier volatility of around 11 percent is still a relatively low value.
It would seem that the largest beneficiary of the increase in volatility in the period of greater uncertainty could be a safe Japanese yen. Here, also volatility systematically decreased from 2016 with almost 17 percent to 4.5 in mid-April. Trade war, a fall in the stock markets or an increase in tension in the Middle East led to an increase in the expected volatility on the yen only to around 7.7 percent.
This can be summarized by the fact that the currency market, in contrast to the stock market, for which the expected volatility has increased much more, needs even stronger and stronger incentives to move to a period of greater volatility.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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