Currency Volatility Lags as Fireworks Leave Traders Trendless

(Bloomberg) -- The Russian ruble is plunging, the Turkish lira is near a record low against the dollar, and there’s talk of China mulling a yuan devaluation -- but you wouldn’t know it by looking at broad measures of currency volatility.

Gauges of price swings in the $5.1-trillion-a-day foreign-exchange market have languished over the past month, even as punitive U.S. sanctions roil Russian markets and concerns about an overheating Turkish economy sink the lira. Not even the threat of a trade war with China can rattle currency traders, as the Deutsche Bank 1-month and 3-month implied volatility indexes linger near three-month lows.

One reason why: beyond the ruble and lira, widely traded pairs such as euro-dollar and dollar-yen have yet to break out of established ranges on the heels of escalating geopolitical tensions. The lack of meaningful trading cues amid the headlines is weighing down currency volatility across the board, according to Daragh Maher, head of U.S. foreign-exchange strategy at HSBC Securities.

“It’s not like the news flow has prompted some kind of major dollar trend or euro trend,” Maher said in an interview. “There’s not a perception that these headlines are particular game-changers, and that compresses volatility.”

The ruble’s reaction to U.S. sanctions serves as an example. Even as implied 1-month volatility in the dollar-ruble pair spikes to the highest level in two years, the isolated nature of the sanctions means that turbulence won’t translate into broader currency fluctuations, Maher said.

Traders are also shrugging off the trade spat with China. While reports that the nation is evaluating the potential impact of gradual yuan depreciation initially sparked a 0.2 percent drop in the Chinese currency, the dollar-yuan pair quickly recovered to trade within the 2 percent range it’s been confined to since February.

Chinese President Xi Jinping soothed investors anxious that tit-for-tat tariffs would escalate into a full trade war with a pledge to open up markets and support global trade. Evident in the currency market’s response is the assumption that negotiations will be the ultimate path, according to Maher.

“Xi’s comments overnight have helped reaffirm that as the appropriate stance,” Maher said. “That may change, but until it does, it’s very hard to get too excited about this.”

--With assistance from Robert Fullem

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Greg Chang, Boris Korby

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