Foreign exchange volatility has risen of late and it doesn’t depend on the dollar necessarily going up.
The team at SocGen says that there is more to come and demonstrates with a EUR/USD chart:
Here is their view, courtesy of eFXnews:
Given the dovish arsenal deployed by most G10 central banks, most of currency volatility originating from rates volatility should come from the USD side, says SocGen.
“USD short-rates volatility is about three times higher than its EUR equivalent. This says almost everything about the relative rates risk, even after the latest Fed reluctance to embrace full monetary divergence. The schedule of exit timing should continue to drive USD vol this year. Crucially, the tipping point will not be reached right after the first hike, because data-dependency implies that uncertainty will not be resolved,†SocGen adds.
“Unlike previous tightening cycles which saw a steady series of hikes, this time the FOMC could skip meetings. This recurring uncertainty during the cycle could keep USD rates vol elevated. The direct spillover will be a continuation of the dollar uptrend in a more volatile fashion than its one-way move until now,†SocGen argues.
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