An employee counts cash at a store in California, U.S. (Photographer: Patrick T. Fallon/Bloomberg)

Now Volatility Is Hitting Markets Where It Actually Matters

(Bloomberg) -- As U.S. stocks enter a more tranquil era, currency markets are looking jittery.

The asset class that directly influences the terms of global trade is restive on the heels of protectionism, monetary tightening and fissures in the synchronized growth story.

The JPMorgan Global FX Volatility Index is higher on the week -- heading to its second consecutive monthly gain -- while gauges in interest-rate and equity markets are relatively subdued.

“In January/February, FX vol increased ahead of equity and rates market vol,” strategists at BNP Paribas SA wrote in a note. “A similar pattern is starting to emerge – FX vol has increased over the past week, while rates and equity vols have remained subdued, for now.”

Add the stronger dollar to the lists of stresses, whipsawing emerging-market currencies amid tighter liquidity conditions and trade frictions. With the asset class on pace for a fourth consecutive week of losses, a JPMorgan index of implied vols hovers close to the highest level since February 2017.

Currency swings on an absolute basis aren’t ringing alarm bells yet, and cash equity markets have been lashed by the U.S.-China spat this week. But stock volatility remains little moved, unlike the FX counterpart.

Foreign-exchange markets might be the right signal to follow for options traders, according to BNP Paribas analysts. They point to looming growth risks -- namely, an uptick in the dispersion of economic data across the world -- that should increase premiums to hedge price swings across asset classes.

It’s a case of catch-up. Earlier in the year, choppy equity-market conditions took hold as FX traders yawned.

This time around, stocks are the sanguine cohort, according to derivatives prices. The short-vol trade is back in vogue, while the Cboe Volatility Index hasn’t closed above 15 since May. On Friday, the gauge stood at 13.35.

An uncertain economic backdrop means that’s unlikely to last, according to Michael Purves, Weeden & Co.’s chief global strategist.

“If the VIX has that 2017 feel about it, the broader backdrop is hardly there,” he wrote in a note. “Tariffs, global growth slow down, higher rates, and the continued transition of central banking should all contribute to driving the VIX into a higher and more dynamic range.”

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