Calm before the…
Markets have begun this week with a somehow threatening sense of normality. Despite the volatility seen over the past week and a half, stable ranges appear to be establishing themselves in FX. Meanwhile equity market volatility is moderating. This is undoubtedly a relative calm in comparison to the volatility of last week, but what comes next?
Receding volatility may counterintuitively be concerning to some given that major dislocations in market pricing are still evident. For example, EURUSD still implies a risk premium of between 5 and 6%, stretching the upper limits of price versus fundamentals. Many will take the drop down in volatility as a good sign. After all, levels of implied volatility approaching 20% in EUR/USD are sustainable only in major global crises.
However, emerging price stability can also be seen as a risk of complacency where dislocations between price and value still exist. In markets there has been continued discussion of the so-called Mar-a-Lago accord. As Treasury Secretary Scott Bessent commences trade negotiations with willing nations, markets will be keen to see whether FX and the Dollar come into the scope of any prospective deal. Negotiating nations currently centre on Japan and Korea both of whom would conveniently fit perfectly into the play book of such an accord.
The target of the Mar-a-Lago accord, if you recall, would be those nations whose own currencies create a perceived upward pressure on the Dollar. That comes by virtue of firstly their own currency being undervalued and is aided by being a material net exporter to the USA. The final necessary condition is being willing to negotiate with the US. Many emerging market economies will satisfy the first condition but are unlikely to draw the attention of negotiators. Therefore, emerging market FX is still likely to underperform in the current environment. The same goes for commodity currencies where despite a minor recovery in oil prices, demand threats will continue to outweigh any effect of USD selling.
Discussion and Analysis by Charles Porter
Related Insights
Daily Brief – Rotation out of the US
Humphrey Percy
Mon 14 Apr 2025
Rotation out of the US Quite what that rotation may mean and by how much is exercising the markets and also doubtless the Chair of the Federal Reserve. For the yield on 10 year US Treasury Bonds to move from 3.99% to 4.50% in a week is extraordinary. At the same time, the US Dollar […]
Daily Brief – China
China FX has found some breathing room against the backdrop of a weaker Dollar. As we know, that weaker Dollar is largely created by two factors. Firstly, the Dollar losing its safe haven status and even attracting a risk premium as investors shield themselves from the uncertainty of President Trump’s tariff game. Secondly, again as […]
Daily Brief – UK Employment
Humphrey Percy
Wed 16 Apr 2025
UK Employment At 75.1%, employment for people aged 16-64 looks sort of OK depending on what that really means, but it does not alter the fact that there are currently 1.55 million people who are unemployed, or 4.4% of the potential workforce. Another much more significant number, is that there are currently 9.27 million people […]
