FX: Is the low currency volatility likely to become the new norm? - BNZ

In its Currency Research report, analysts at BNZ, look at the recent trend in volatility in the currency market.  They see that less speculative activity, lower volatility in growth and inflation, and the risk of currency positions being ruined by an errant tweet might explain lower volatility.

Key Quotes: 

“NZD (and other) currency volatility has been on a falling trend over the past several years. The low volatility environment is not unprecedented. Indeed, such low volatility, if not lower, was a feature of the currency market during 1990-1997."

“A question is why is currency volatility so low at present? Or maybe the right question is, is currency volatility back down to normal and why was currency volatility so high from 1998 through to 2017?"

"We don’t have the answers but can make some educated guesses. One is that speculative activity in currency markets has reduced, perhaps because of increased regulations on trading banks that have reduced such activity, and reduced hedge fund activity as their access to leverage through investment banks has been curtailed."

"Low currency volatility might also reflect the current macroeconomic environment – low volatility in growth and inflation. In such a world, particularly if the global economic and policy cycle is well synchronised across countries, a lack of trading ideas prevails."

“At this juncture the honest thing to say is that we just don’t know how currency volatility will pan out over the years to come. On the “low volatility begets low volatility” theory, one could easily see a return back to the 1990s environment. The implication for corporates is that a lower volatility environment doesn’t preclude steady moves up or down in the currency, but trading opportunities to take advantage of currency movements become fewer and far between.”