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22 Apr 2015
High FX volatility is here to stay – BAML
FXStreet (Barcelona) - Strategists at BofA-Merrill Lynch, comment that FX volatility has increased more than their expectations due to rising global risk appetite, and the long FX vol trades are here to stay.
Key Quotes
“We have been long FX vol this year, but it has increased even more than we were expecting. Average intraday FX ranges have increased to levels previously seen only during crises. This is still the case after we remove this year's outliers from the data.”
“Moreover, FX vol has increased this year despite a drop in rates volatility, solid global data and a further increase in global risk appetite.”
“We discuss four possible explanations. First, the replacement of central bank forward guidance with data dependence. Second, crowded positions have been squeezed. Third, competitive devaluation and low yields globally have made the FX market the main vehicle to position for macro views. And fourth, inadequate FX market liquidity because of strict new regulations. The third and fourth reasons seem to be the most likely to us and both suggest high volatility is here to stay.”
Key Quotes
“We have been long FX vol this year, but it has increased even more than we were expecting. Average intraday FX ranges have increased to levels previously seen only during crises. This is still the case after we remove this year's outliers from the data.”
“Moreover, FX vol has increased this year despite a drop in rates volatility, solid global data and a further increase in global risk appetite.”
“We discuss four possible explanations. First, the replacement of central bank forward guidance with data dependence. Second, crowded positions have been squeezed. Third, competitive devaluation and low yields globally have made the FX market the main vehicle to position for macro views. And fourth, inadequate FX market liquidity because of strict new regulations. The third and fourth reasons seem to be the most likely to us and both suggest high volatility is here to stay.”