MARKET WATCH
at multi- year lows, interest rate differentials are not the drivers they once were in forex. Certainly, volatility in other risky asset classes such as equities reduces the appeal of the carry trade, in which low- yielding currencies such as the yen nare sold to fund the p u r c h a s e of
higher-
yield i n g assets.
Yes, a big slide in equity markets
can
still mean in v e st o r s move into safe haven
assets
such as the yen or the Swiss The
however,
franc. effect, is
nothing like the
risk-on/
risk-off days in the wake of the financial crisis that saw the currency market slavishly follow the fortunes of stocks and
other risky assets.
With depressed volatility, momentum or trend-following strategies remain appealing. This is particularly true as investors take advantage of the
headlines (and tweets from Mr Trump) on trade wars, geopolitical risk and other topics that could unsettle the global economy. Recent history suggests such periods of relative stability in currency market are quite rare, raising the risk of market turmoil that could ruin those momentum strategies.
The dollar is stuck in a range as structural, political and cyclical factors are pulling in different directions
relatively tight ranges in price movement that have developed in recent months.
Of course, one caveat to that is how long
the forex market
can remain indifferent to the exceptionally large deluge of
Mr
FX Desbarres notes that,
perhaps unsurprisingly, volatility remains the highest in emerging market currencies such as the South African rand, the Turkish lira and Russian rouble. He notes, however, that with the exception of the rouble against the dollar, as of April 2018 volatility is in line with, or lower than, the average of the past 12 months in all currency pairs globally.
“This suggests that
the
threshold for FX volatility to materially rise is potentially quite high,” he says. “But it also points to a risk that markets
may be growing complacent and may not be prepared or positioned for any spike higher in FX volatility.” For currency investors, that may finally result in new trends to follow.
Raconteur Excerpt fom Forex Trading Strategies Digital Report FX TRADER MAGAZINE July - September 2018 15
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