Currency Volatility: Quiet Times

Mid Week Bond Update

Currency Volatility: Quiet Times

At an all-time low, what does currency volatility say about today's market conditions?


What’s the message in the recent calm in currency volatility? Western Asset notes that one common measure, the Deutsche Bank FX Volatility Indicator (CVIX just reached its lowest level since it was created in August 2001.1
 

Currency Volatility: Historically Low

Chart courtesy of Western Asset. Source: Bloomberg, as of Jan 21, 2020. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

Currency values, and the corresponding volatility, certainly reflect geopolitics and relative rates of economic growth. But they are also greatly influenced by central bank actions that influence the course of interest rates and inflation and resulting flows of capital.

However, developed-market central banks are not only issuing clear forward guidance but are also nearly unanimous in holding rates down to promote growth and financial stability. And since recent moves by those banks appear to be having smaller impact, the inclination to make further policy changes is low.

That’s led Western Asset to conclude that the current price of FX volatility is “low but fair”, and that opportunities in this space are likely to emerge from one-off instances of volatility skew rather than broad shifts in volatility themselves.
 

On the rise: 20-Year Treasuries

On Jan. 16, the Treasury Department announced it would begin issuing bonds with a maturity of 20 years during the first half of 2020. This would be the first 20-year issuance since March 1986.

Treasury Secretary Steven Mnuchin couched the announcement in terms of boosting the popularity of Treasuries among investors other than pension funds, which tend to focus on 30-year maturities.

Seeking to increase the uptake of Treasuries is understandable given the steadily growing U.S. budget deficit, which ended calendar 2019 at just over $1 trillion, 17% above the previous year’s figure. Given increasing calls for fiscal stimulus to support the economy as monetary stimulus loses impact, it seems unlikely that existing fiscal measures (and the corresponding growth in the US deficit) will be scaled back any time soon.
 

On the slide: U.S. Job Openings 

Investors in U.S. corporate debt found little to complain about in the Bureau of Labor Statistics job openings survey for November 2019 – the JOLTS report – which showed a seasonally-adjusted 6.8 million openings, 561,000 fewer than the previous month, and the lowest level since February 2018, nearly two years ago.

Despite the fall, openings still outnumbered Americans considered unemployed by nearly one million. The biggest declines during November took place in retail and construction. The quits rate – measuring employees who left jobs voluntarily – stood unchanged at 2.3%, an indication that employee sentiment remained unchanged for the month. All in all, the November report appeared to suggest that the current level of economic growth would continue.

 

Note: The year for all dates is 2020 unless otherwise indicated


Endnote:

1 The CVIX declined to 4.97 on January 21, 2020, Source: Bloomberg, Jan 21, 2020, 4:00 PM ET


Definitions:

The Deutsche Bank FX Volatility Indicator (CVIX) reflects the implied volatility of currency markets, i.e., the market's expectation of future currency volatility.

Foreign exchange (FX) refers to the markets for currencies between the U.S. dollar and non-U.S. currencies.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted by the US Department of Labor, producing data on job openings, hires, and separations.

 

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