Volatility: A Lull That Could Deceive?

David Simmonds, Head of Currency & EM Strategy, RBS, takes a look at volatility across the markets in his paper ‘RBS Currency Themes’, of September 30.

Current volatility trends

Volatility is trending low across the major markets after the Fed’s momentous decision not to press ahead with a curtailment of the QE3 bond purchase program.

Currency – Eur/USD:

1-eur-usd0implied volatility

U.S. Treasuries:




Fed: New and significant information

The new and significant information that could be gleaned from the ‘no-taper’ action is that the Fed is shifting gears to focus on disinflation risks – in direct contrast to its earlier apprehensions regarding the adverse consequences of continuing QE3.

So the Fed balked – and this means tapering could be postponed by many months, says the report – for the markets it is a signal that its “low/loose for longer.”

And that means volatility could remain low.

The dollar is therefore likely to trend on the weak side, and these expectations are getting built in judging from the chart below of the Euro$ Future December 2014:


But…could this be a lull that deceives?

The report points to unsettling factors that could yet change the volatility picture for the worse: Political turmoil in Italy that could entail fresh elections. Unsettled conditions in Greece. The political logjam in Washington resulting in the government shutdown (are the markets unduly complacent on this?). The shaky macro-economic fundamentals of many emerging markets.

And most important, despite the no-taper, U.S. real yields are still much higher than they were some months ago.

“We are in the volatility of transition to something else…something more aromatic is afoot,” the report cautions.