Tuesday, January 21, 2020

Eerie Calm Currency Markets

During Doubleline Capital's recent "Round Table Prime" session -- which brings together a tight group of credible market actors to discuss the state of the global economy and markets -- the firm's founder, and largest bond manager in the world, Jeffrey Gundlach made a point that jibes with my Sunday morning commentary:
"...once you get an unwinding of the herding mentality you exacerbate the magnitude of the movement."
Speaking of such mentality -- and the bubbleness I pointed out Sunday morning -- here's currency analyst Jane Foley commenting on the record lack of volatility in foreign exchange markets: 

Emphasis mine...
“The signing of the phase one trade deal has led investors to assume that a negative threat to global growth has been removed,” said Jane Foley, head of FX strategy at Rabobank. The risk of such unprecedented low volatility “is that investors start to behave as if high-risk assets such as stocks can never go down. This would be classic bubble behavior,” she said.
And here's Commerzbank's head of currency strategy, Ulrich Leuchtmann, on the same:
FX markets have to produce at least so much volatility that shifts in fundamentals can be properly reflected,” he said. “My gut feeling is we are at the lower end of what’s possible before the FX market loses its ability to reflect fundamentals.”
Here's our graph that illustrates (per Foley and Leuchtmann) what I'll call an eerie calm in global currency markets (each previous dip to [or close to] the yellow line was followed shortly thereafter by notable volatility in the equity market):   click to enlarge...

JP Morgan Global FX Volatility Index

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