Low volatility breeds currency contempt

Volatility levels in major asset classes

Low volatility in the foreign exchange market has created a very challenging environment for anyone trying to generate returns. Consensus trades have been shaken out and many managers are now reluctant to take aggressive positions. We remain convinced that diverging central bank policy will eventually be reflected in exchange rates so maintain our short euro, long US dollar (USD) and short Japanese yen (JPY) positions. USDJPY has been highly correlated with US Treasury yields and the rally in bond prices is beginning to unwind with more positive data. The one area of FX where there is some momentum is emerging markets and we have been selectively buying high carry currencies such as the Brazilian real, but balancing it with short positions in other beta currencies such as the South African rand.

Paul Lambert, Head of Currency, Fixed Income, Insight

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