After years of slowing FX market volatility, the coronavirus pandemic seems to have broken the direct correlation between bonds and FX’s implied volatility. With yields continuing to drop, the FX market’s volatility is picking up.
The rotation from bonds back to the FX world is a curious one. The highest 2y rate is in New Zealand at 0.29%, while the 10y rate in the Eurozone is dragging down the average yield worldwide. Suddenly, FX traders have plenty of opportunities for speculation in front of their eyes – is this just temporary, or the biggest FX moves did not come yet?
The Trend Looks Poised to Continue
With central banks committed to keeping the interest rates low and the monetary policy extremely accommodative, the chances are that the bond yields will continue their fall. Therefore, investors are forced to search for a higher yield in different areas. FX looks like the first choice.
For instance, the EURUSD pair, the most liquid of the FX dashboard, moved more than 10% since the Recovery Fund’s announcement in early April. Moreover, the EU Summit deal regarding shared burden and the distributions of loans and grants pushed the pair even higher. In three months, it traveled more than in the previous two years.
By the looks of it, the FX market’s increased volatility is poised to continue. When the rotation into and out of different asset classes takes place, the first market to notice a pick-up in volatility is the currency exchange market.
2020 was not supposed to be a regular trading year for the currency traders. Anyone involved in trading for a living knew beforehand that the market would not move decisively until the U.S. elections are behind us.
That changed with the COVID-19 pandemic.
If what we have seen in the past three to four months has nothing to do with the U.S. elections, then the 10% move in the EURUSD pair may just be a small reaction prior to the main event. The U.S. elections are even more important now than before, as the entire world is affected by the pandemic, and there is no single nation that takes leadership in times of such a crisis.
If prior to 2020 summer trading used to be lull and dominated by tight ranges, this year is different. The EURUSD pushed above 1.19 in July after tripping stops after stops for the entire month.
When it comes to volatility, not direction, expect August to be no different.