So far this week, FX is relatively calm in the face of a chaotic Treasury market. Economists at Société Générale analyze the FX market outlook.
FX volatility has more upside than the Dollar does
US yields can overshoot any concept of ‘fair value’ in the face of supply, an inverted curve, Fed chants of ‘higher for longer’ and investors who have already ‘bought the dip’ several times several times over. But if rising US yields are having less of an impact on the major currencies, the EUR/USD low in the coming weeks (for example) won’t be much below parity, if at all. Maybe the USD/JPY peak isn’t very far from 150. That, however, won’t prevent FX volatility from rising.
USD/JPY can’t settle at 150, and nor can EUR/USD settle down at 1.05, any more than 10-year Notes can remain at 4.75% for long.
Violent yield moves increase economic uncertainty and that means increased two-way risk in currency pairs.
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