FX volatility falls to pre-Covid lows as traders wait it out

London

CURRENCY market volatility on Tuesday fell to its lowest since before the Covid-19 pandemic roiled markets in March 2020, as investors sat on the sidelines waiting for clearer signals on the inflation trajectory and how central banks will respond.

With an impending European Central Bank (ECB) meeting on Thursday and US inflation data due the same day, and a US Federal Reserve meeting next week, currencies appear to be treading water.

Range-bound currency markets means a fall in volatility. The Deutsche Bank Currency Volatility Index hit its lowest since February last year.

Marshall Gittler, head of investment research at BDSwiss, called the FX market "nearly frozen" with trade-weighted indices on June 7 stuck within 0.1 per cent ranges. While volatility levels are nowhere close to record lows, "the doldrums are widespread - all major pairs are below their average volume," he added.

The US dollar found a bit of support on Tuesday as investors prepared for the inflation data following weaker-than-expected jobs data, which has eased concerns about an early tapering of the Federal Reserve's monetary stimulus.

The euro fell marginally, weakened by the US dollar's strength and data showing that German industrial production numbers declined in April. Currency markets were generally in a holding pattern ahead of Thursday, when the ECB meets and US inflation numbers are published.

"As investors continue to process G-7 corporate tax proposals, low volatility remains the name of the game in FX into this week's 'super Thursday' (US CPI and ECB meeting)," ING analysts said in a note.

The US dollar index rose 0.1 per cent to 90.105, while against the euro, the greenback was 0.1 per cent higher at US$1.2174. The British pound fell 0.2 per cent to US$1.4147 and the Australian dollar eased 0.2 per cent to US$0.7742, with both stuck in ranges seen over the past couple of months.

With recent trading channels tight, implied volatilities on both currencies have dropped to their lowest levels since early 2020, before markets were pummelled by the Covid-19 pandemic. The Japanese yen dropped as the greenback rose, fetching 109.48 yen per US dollar, down 0.2 per cent on the day.

Cryptocurrencies dropped but trading was generally calm. Bitcoin earlier eased to a three-week low of US$32,418, while Ether fell 4 per cent to a one-week low of US$2,431.93. REUTERS