JPMorgan Considers Upping Its Volatility Call as Clients Protest

(Bloomberg) -- JPMorgan Chase & Co. may double down on a call for increased volatility in currency markets, saying that a client backlash over its forecast demonstrates how overly complacent investors have become.

In the bank’s year-ahead currency outlook, analysts noted on Nov. 22 that plunging volatility had made bets on an increase “ultra-cheap.” While not anticipating a “V-shaped” rebound, they wrote that abnormally low levels argued for allocating larger-than-average risk to bullish volatility positions, either through options or outright longs.

The feedback from clients in the weeks that followed was “bordering on derision,” strategists led by Arindam Sandilya wrote in a Dec. 13 note, even though the bank’s original recommendations were “far from stridently bullish.” As a result of the “surprising degree of disagreement,” the analysts are considering boosting their long-volatility calls amid what they see as complacency around the notion of a pickup in turbulence.

“Despite current eyewateringly low implied vol levels, we were circumspect around the idea of buying vol at the time of writing the outlook,” Sandilya wrote. “But conversations over the past few days make us question whether we should lean contrarian long more forcefully in the new year.”

Currency turbulence has been declining over the past few months as the U.S. and China remained locked in a protracted trade war and major central banks moved largely in lockstep. JPMorgan’s measure of global FX price swings dropped to a five-year low this week, while one-month implied volatility sank to record lows in the euro, Canadian dollar and New Zealand dollar late last month.

The pushback from clients wasn’t a blanket condemnation, according to the analysts. The idea that positioning for emerging-market turbulence over that of developed markets was attractive received widespread agreement, “even among long vol skeptics.”

However, the bank’s suggestion to sell delta-hedged dollar-yen risk-reversals -- which amounts to selling volatility -- amid shifting Japanese FX hedging preferences was met with skepticism. That’s largely due to the yen’s haven qualities in times of market stress, the analysts wrote.

“This makes for a striking disconnect between skepticism around the broad notion of buying FX vol and openness to owning Yen vol,” the analysts wrote in the Dec. 13 note.

--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, Dave Liedtka, Brendan Walsh

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