Interest rates increasingly important for currencies
March 14 (Reuters) -Quiet currency markets are becoming quieter, heightening the importance of interest rates in determining the direction of currencies.
EUR/USD, which is the most heavily traded currency pair and therefore more likely to have a bigger influence on wider currency markets, traded in one of the smallest annual ranges last year and looks set to trade similarly this year.
Volatility expressed by currency options has tumbled this month to its lowest point in more than two years with one-month EUR/USD vol falling below 5.0.
Only a few short periods have been spent at such low levels since the single currency's inception.
The slowdown in activity in FX markets is occurring when many equity markets are booming and ahead of anticipated easing cycles that may fuel the current will to take greater risks.
Quiet conditions coupled with robust risk appetite are the two elements likely to fuel demand for carry trades for which the dollar and its underlying interest rate - currently 5.5% - are the benchmark.
Currencies undermined by lower rates may come under more pressure while those with rates in excess of the U.S. may draw investors.
Currencies that are free-floating may do better than those that are not, but the longer this quiet spell holds, the greater the will to gamble will become, heightening demand for those that are restricted - if they are supported by a very high interest rate.
Vols for some usually risky but high-yielding currencies like India's rupee, Indonesia's rupiah and Turkey's lira have collapsed, which should heighten their appeal.
For more click on FXBUZ
Slump in volatility https://tmsnrt.rs/3vau7xn
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
</body></html>Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
