May you live in interesting times, The Lovers (reversed)

Leitmotif 4: FX volatility & divergence

The Lovers Tarot card, upside down signifies loss of balance, one-sidedness, disharmony

Foreign exchange (FX) volatility is surprisingly low.  Viewed in isolation, the trailing volatility of daily changes in exchange rates is not exceptional, around median historic levels.  But in the context of significant shifts in underlying economic fundamentals and interest-rates volatility bouncing near multi-decade highs median volatility is surprising.  Still more perplexing, other than for the yen, the vol that has manifest has mostly represented “fury signifying nothing”: the level of most major currencies’ real exchange is little since 2016.  FX options markets are pricing even lower volatility for 2024.

Is even lower volatility in FX likely?  As I have highlighted throughout this series, I expect consensus expectations for economic and market outcomes to be well challenged this year.  Those challenges also are likely to call into question the credibility of central banks.  Those facts alone would suggest higher volatility.  But 2024 also is a year with the potential for serious exogenous event risks, beginning with an unusually full election calendar, two major wars and threatened hostilities on two other major fronts.  Does it make sense that with so much unbalance in their underlying fundamentals that currencies appear so balanced?