Next interest rate cycle likely to cause structurally high volatility again – Commerzbank
|Ulrich Leuchtmann, Head of FX and Commodity Research, shares his view about structural shifts in volatility.
Will the situation of structurally low volatility persist?
The clearer the interest rate picture becomes, the less likely major interest rate surprises are. And this also makes large exchange rate jumps less likely. Structurally, vola decreases. This does not apply to all currencies. In Japan we see a completely different interest rate cycle; in New Zealand, it is still not over; and in Switzerland, the intervention risk dominates, so the exchange rate is primarily an artificial product of the SNB.
However, will the situation of structurally low volatility persist? I don't think so! The next interest rate cycle is sure to come. The market is already expecting interest rate cuts next year. These will not be synchronized either. Nor will they be of the same magnitude everywhere. And they are therefore likely to cause structurally high volatility again. The recent back and forth in EUR/USD, driven by Fed and ECB rate cut expectations, is a foretaste.
And so, once again, I see my role as an FX analyst as being the admonisher who warns against ignoring FX risks in times of low FX volatility.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.