1 May 2014
Volatility RIP until the day of resurrection - RBS
FXStreet (Bali) - David Simmonds, Head of Currency & EM Strategy at RBS, notes that this is one of the quieter, more range bound periods for major currencies that he can remember.
Key Quotes
"Faced with FX market torpor, the challenge is to think carefully about when how and why this quiet period may end; but without trying to invent drama where there may not be any. that Day will come, it always does. But that Day is not today!"
"Currency market volatility is probably suppressed for longer because major central banks retain a firm grip on front end interest rate expectations. Low for Longer lives! The central bank 'message' is lent most credibility by the continued absence of inflationary pressures. Indeed, for the European Central bank in particular, it's disinflation that is the more significant monetary policy challenge."
"Hence the great central bank driven, global asset price inflation trade is ongoing. The five year equity bull market is intact, the inexorable five year tightening in corporate credit markets is unbroken; a voracious (soon to become indiscriminate) hunt for yield means money continues to pour into Southern European fixed income. As memories of last year's Fed Taper Tantrum related sell off start to fade, emerging markets currencies are also again attracting some renewed 'Carry' support as low volatility everywhere drives the hunt for higher risk adjusted returns."
"It is not obvious that this will change very soon. Fed Chair Janet Yellen sounds solidly dovish based on existing Fed projections, albeit pragmatically so – she and the FOMC would revise their view if their expectations around the data changed. At the ECB, as mentioned, pressure is not to tighten but to ease monetary policy anew. At Bank of Japan, the perennial question is whether and when more monetary stimulus may be needed in pursuit of a (probably elusive) 2% inflation target. That leaves Bank of England as potentially most interesting for markets in a world of 'data dependency', a world where more specific unemployment rate guidance to monetary policy thresholds has been swiftly ditched in favour of guidance that is much more opaque. It is in the UK where data dependency may lead markets to price earlier and quicker monetary tightening relative perhaps to the Fed."
Key Quotes
"Faced with FX market torpor, the challenge is to think carefully about when how and why this quiet period may end; but without trying to invent drama where there may not be any. that Day will come, it always does. But that Day is not today!"
"Currency market volatility is probably suppressed for longer because major central banks retain a firm grip on front end interest rate expectations. Low for Longer lives! The central bank 'message' is lent most credibility by the continued absence of inflationary pressures. Indeed, for the European Central bank in particular, it's disinflation that is the more significant monetary policy challenge."
"Hence the great central bank driven, global asset price inflation trade is ongoing. The five year equity bull market is intact, the inexorable five year tightening in corporate credit markets is unbroken; a voracious (soon to become indiscriminate) hunt for yield means money continues to pour into Southern European fixed income. As memories of last year's Fed Taper Tantrum related sell off start to fade, emerging markets currencies are also again attracting some renewed 'Carry' support as low volatility everywhere drives the hunt for higher risk adjusted returns."
"It is not obvious that this will change very soon. Fed Chair Janet Yellen sounds solidly dovish based on existing Fed projections, albeit pragmatically so – she and the FOMC would revise their view if their expectations around the data changed. At the ECB, as mentioned, pressure is not to tighten but to ease monetary policy anew. At Bank of Japan, the perennial question is whether and when more monetary stimulus may be needed in pursuit of a (probably elusive) 2% inflation target. That leaves Bank of England as potentially most interesting for markets in a world of 'data dependency', a world where more specific unemployment rate guidance to monetary policy thresholds has been swiftly ditched in favour of guidance that is much more opaque. It is in the UK where data dependency may lead markets to price earlier and quicker monetary tightening relative perhaps to the Fed."