Volatility to stay elevated after Federal Reserve delay?


Bloomberg ran a piece today noting the elevated volatility within FX markets, the highest within a four year stretch, which has been a nice boon to many brokers and trading venues within the industry. Bloomberg’s Rachel Evans noted “already the highest in four years, volatility looks set for an extended stay after the Federal Reserve rattled markets last week by not raising interest rates.”

Morgan Stanley as relayed to Bloomberg believes that the U.S. central bank by leaving the question of when it will move is hanging over markets, its focus on economic data and international circumstances means every report will stir more volatility.

Fed Chair Janet Yellen says she’s monitoring risks from China, while policy makers in Europe and Japan weigh further stimulus as the Fed looks to raise U.S. rates for the first time since 2006. Will Japan ease more is now a question many are considering as they have yet to hit the 2% inflation target set out by the Bank of Japan roughly three years ago.

 

JPMorgan Chase & Co.’s gauge of global currency volatility rose to 11.3 percent on Sept. 7, the highest since February, as traders pondered whether the Fed would raise rates 10 days later. The index has averaged its highest since 2011 this year even as the Fed hasn’t changed policy. It was at 10.6 percent as of 10:37 a.m. Tuesday in Singapore.
JPMorgan Chase & Co.’s gauge of global currency volatility rose to 11.3 percent on Sept. 7, the highest since February, as traders pondered whether the Fed would raise rates 10 days later. The index has averaged its highest since 2011 this year even as the Fed hasn’t changed policy. It was at 10.6 percent as of 10:37 a.m. Tuesday in Singapore.

 

This has been an excellent time for brokers as readers of LeapRate have witnessed through the last couple of months volume reports, LeapRate’s August Retail FX Volume Index rose 5%. Heightened volatility is a time when traders are keen to monitor the market with a sharp eye for sure, and even if volatility remains raised relative to prior years by just half, many would take it as the opportunities to intraday and swing trade create lots of hedging and opportunities to profit (or lose a lot!). Corporate FX managers naturally also have their heads spinning as how to minimize FX risk while attempting to profit from any new trend shifts.

So what may be a good trade or hedge?  Morgan Stanley favors buying options betting on volatility in the British pound. However, markets are always moving forward so if opportunities are missed there is the next one right around the corner as noted by Steven Saywell, London-based global head of foreign-exchange strategy at BNP Paribas SA, he stated: “As soon as they hike once, the question is going to be how quickly do they hike again, and again, that’s going to be determined by the data, volatility will probably increase.”

For more on this topic, check out the Bloomberg piece by clicking here.

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Volatility to stay elevated after Federal Reserve delay?

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