dollar euro FX volatility

It’s Time To Start Worrying About FX Vol

I think it’s probably time to start getting concerned about FX vol.

This morning’s dovish comments from Mario Draghi (“economic outlook on the downside,” “no convincing upward trend in underlying inflation,” etc. etc.) sent the euro tumbling, underscoring yet again how laser focused the market is on the utterances of policymakers.

“EUR/USD drops to fresh low under 1.0600, breached tech support from the 55-DMA and is testing the week’s low near 1.0580,” Bloomberg wrote, recounting the market’s reaction to Draghi’s presser. “EUR drop filled bids from 1.0625 to 1.0600, and also breached tech support near Tuesday low at 1.0598.”

Apparently, the only thing keeping traders from piling into the dollar is the uncertainty surrounding tomorrow’s circus in DC. “USD buying seen from short-term accounts, some caution over building sizable USD longs ahead of the Trump inaugural tomorrow,” one trader told Bloomberg. 

To be sure, it’s nothing new for markets to trade off policymaker soundbites. That said, I’m concerned that in the fog of uncertainty (Brexit worries, concerns around elections in Europe, the looming showdown between the Fed and the Trump administration over dollar strength, the Politburo’s control over RMB policy, etc.) the divide between politics and monetary policy is disappearing. Indeed, political expediency may require that the two be merged. That could make it decidedly difficult for FX markets to determine who’s ultimately in charge and whose comments should be given the most weight.

That’s something we need to think seriously about going forward and I think the following charts back up my contention.

pound

eur

dollar

8 comments on “It’s Time To Start Worrying About FX Vol

  1. Bill says:

    I guess we should not assume that Trump understands the importance of central bank independence. Other countries have more of it but we still manage to lecture them on its virtues. If I was generous I would assume that he has been confused by the combination of fiscal stimulus and QE.
    Financial markets will penalize him (us) heavily if he leans too hard on ‘Mother’ (Volcker’s term). But then his ‘base’ might just yammer for a new Chair. Yeesh.

  2. “I guess we should not assume that Trump understands the importance of central bank independence”…

    No we should not.

  3. […] a put up on Thursday, I advised that “it is time to begin worrying about FX vol.” My rivalry is that political uncertainty goes to make for turbulent instances in forex […]

  4. […] So with that long-winded caveat now firmly in the books, let me fall into the trap described above. Credit Suisse is out with a new piece that seems to confirm precisely what I said last week about the possibility that the line between politics and monetary policy is getting increasingly blurry. Here’s what I said on Thursday: […]

  5. […] a post on Thursday, I suggested that “it’s time to start worrying about FX vol.” My contention is that political uncertainty is going to make for turbulent times in currency […]

  6. […] The Heisenberg (Nope, not the guy from Breaking Bad! Or is he?) wrote in his blog entry on how it’s time to start worrying about FX volatility, all the uncertainty going around the markets is causing the divide between monetary policy and […]

  7. […] The Heisenberg (Nope, not the guy from Breaking Bad! Or is he?) wrote in his blog entry on how it’s time to start worrying about FX volatility , all the uncertainty going around the markets is causing the divide between monetary policy and […]

  8. […] Heisenberg (Nope, not the man from Breaking Dangerous! Or is he?) wrote in his weblog entry on how it’s time to start worrying about FX volatility, all of the uncertainty going across the markets is inflicting the divide between financial […]

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