Sleepy forex markets avoid usual volatility triggers - Financial Times

Major markets are stuck in a deep sleep.

On the face of it, there is enough macroeconomic news around to move currencies and asset markets. News on the potential for a breakthrough in trade talks between the US and China gave Asian equities a kick higher, for example, at the start of last week.

Nonetheless, the three-month rolling range in the euro against the dollar is now at its narrowest ever point at 2.9 per cent, according to Deutsche Bank, even taking into account legacy deutschmark rates going back more than 35 years. It noted that the five-minute late-night shock that hit the yen on the first trading day of this year was “significantly” bigger than the entire range in the euro over the whole of the past three months.

Meanwhile, in the options market, implied volatility — a measure of the expected scale of market shake-ups — is at the bottom end of long-term averages. That is an indication that few expect markets to be roused from their slumber.

Jordan Rochester, currencies analyst at Nomura, said the eerie calm was “not a typical pattern”, considering the pick-up in recession risks across the euro area. But, he said, “it can be explained by the shift from the Fed to neutral” — a reference to the US central bank’s late-January shift away from a preference for steadily rising rates.

This sleepy spell is enough to warrant concern among banks and trading houses for a slow set of first-quarter earnings; JPMorgan has already warned that trading revenues are likely to drop by a “high teens” percentage compared with the same period last year.

It does bring benefits for market speculators, however.

Low volatility is conducive to carry trades — a popular foreign exchange wheeze that involves selling currencies with the lowest interest rates in favour of higher yielding currencies elsewhere. Dutch bank ING said that in this environment, the Indonesian rupiah, Indian rupee, Mexican peso, Russian rouble and Romanian leu could be in a “sweet spot”, with high yields and a relatively low perception of country risk.

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