Guests Michael Metcalfe and Peter Vincent discuss the calmness in currency markets despite ongoing global uncertainties. They explore topics such as cross-country basis, cash holdings, mortgage structures, Eurozone rates, US economy, US election effects, and fiscal sustainability. The podcast also mentions a break announcement and a web portal for research on macroeconomics and markets.
The calmness in FX markets can be attributed to the convergence of interest rate outlooks and a shift in investor behavior towards the short-end of the yield curve.
Investors' increased preference for cash and decreased demand for foreign investments are contributing to the low volatility in FX markets.
Deep dives
Quietness in Markets and Low Volatility
The podcast episode discusses the current quietness in markets and the low volatility observed. The speaker notes that there are very few event risks for the remainder of the year, which has led to low volatility. The equity volatility has significantly dropped, and there are signs of rate volatility also decreasing. However, the most surprising aspect is the calmness in the FX markets, which has been going on for a while. The speaker and guests speculate on the reasons behind this calmness, including the convergence of interest rate outlooks and the shift in investor behavior towards the short-end of the yield curve.
Hiding in Cash and Cross-Country Basis
The discussion focuses on why investors have been hiding in cash and the impact of cross-country basis. The guests explain that investors are now taking less risk due to the availability of higher yields at the short end of the yield curve. They mention that investors are willing to pay smaller premiums to switch their domestic currencies into dollars for US assets, indicating a decreased demand for foreign investments. The guests also touch upon the significance of investors' cash holdings, which have risen by 6% compared to last year, while equity and fixed income investments have experienced shifts in allocation.
Factors Influencing Volatility and the Role of the Bank of Japan
The conversation explores factors that could potentially increase volatility and the role of the Bank of Japan. The guests discuss the potential impact of the US election on geopolitical risk and volatility in the FX markets. They also highlight the importance of fiscal sustainability and the potential volatility it could create, especially in fixed income and FX markets. The Bank of Japan's response to the yen's weakness is also analyzed, with different opinions on whether they will intervene or start normalizing interest rates. The possible occurrence of a US recession and the impact it could have on the dollar and global markets is considered as well.
The calm in currency markets since the late summer has been one of the stranger puzzles of the last year. Its not as though FX markets have nothing to think about - questions over both risky and riskless asset valuation have dominated thinking for the last three months. And yet volatility in most markets, but particularly in FX, is dropping like a stone and reaching multi-year lows. This week, Tim brings back Michael Metcalfe, our Global Head of Macro Strategy, and Peter Vincent, head of Trading in EMEA, to discuss why it has been so calm and what might disrupt things in the New Year.