FX volatility normalized at least for certain currencies
One asset class where normalisation has been rapid is FX volatility, at least on certain currency pairs. EUR-USD one-month volatility is back to its long-term average, and JPY-USD one-month volatility is less than one standard deviation above its long-term average. This is less true of GBP-USD or CAD-USD, where implied volatilities remain historically high. Uncertainty over the future of UK monetary policy may appear particularly high amid discussions of further monetary accommodation through a larger ‘quantitative easing’ programme, but it may not be much higher than uncertainty about US policy going forward. The uncertainty surrounding future economic outcomes seems not to warrant such low levels of implied volatility; the combination of historically low volatilities and economic uncertainty makes FX options on some currencies an enticing market to position or to hedge.
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