Currency Volatility Stays in the Doldrums After U.S. Jobs Data

(Bloomberg) -- Currencies were trapped in an anemic range just a day after stronger-than-forecast U.S. jobs data roiled stocks and bonds.

A gauge of implied price swings in the euro against the dollar held near its lowest in more than a decade even as traders were conflicted on whether to price in more than a 25-basis point rate cut by the Federal Reserve when it meets later this month. Europe’s shared currency largely shrugged off European Central Bank Executive Board member Benoit Coeure’s statement that policy makers could restart quantitative easing if needed.

“There is little shock and awe factor to markets at the moment - there is more of a slow grind towards themes and events, whether it be geopolitical or monetary policy,” said Jonathan Pryor, head of corporate foreign exchange at Investec’s Treasury Risk Solutions. “G-10 currencies will begin to look a lot more liquid if everyone has the confidence to be hanging on a GDP release or inflation reading, rather than being immune to it because it’s a sideshow whilst geopolitical factors play out.”

One-year implied volatility in the euro was at 5.92% on Monday after touching 5.90% last week, the lowest since June 2007. A similar gauge in the dollar-yen was near a 12-year low, while JPMorgan’s Global FX Volatility Index dipped to the lowest in five years last week.

In contrast, a gauge of expected price swings in U.S. Treasuries surged to touch a more than two-year high in June and yields spiked higher after Friday’s release of non-farm payrolls data. While the measure has slipped since then, strategists have warned of a significant risk of an abrupt bond sell-off, which could also engulf stocks.

The dollar’s dominant role in global carry trade is partially responsible for snuffing out currency volatility, according to Valentin Marinov, Credit Agricole’s head of Group of 10 research and strategy.

“Demand for carry trades dominates the price action in FX,” he said. “FX investors are expecting that the low vol environment will persist. The dominance of FX carry trades makes low vol a self-fulfilling expectation and long dollar is the best risk-adjusted carry trade at present.”

Powell Put

One factor that could lend currencies some direction this week is Fed chair Jerome Powell’s testimony as investors try to predict the pace of monetary policy loosening.

If Powell sounds less dovish than expected, he could disappoint those positioned for aggressive action by the Fed. That could “encourage a re-assessment of the readiness of the so-called ‘Powell Put’ and thus boost the U.S. yield differentials in favor of the dollar,” Marinov said.

Over the longer term, twists and turns in the U.S. economy have the potential to rekindle volatility.

“The risks to the current low vol environment are related to the triggers of the any potential unwinding of dollar carry trades,” Marinov said. Therefore, “we will need a more pronounced deterioration in the US macro data to boost volatility.”

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editor responsible for this story: Ven Ram at vram1@bloomberg.net

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