Foreign Currency

Trump, Fed Seen Catapulting FX Volatility From Two-Year Low

(Bloomberg) — A potential Donald Trump-Joe Biden showdown and the start of Federal Reserve interest-rate cuts are set to turbocharge volatility in the $7.5 trillion-a-day currency market.

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Foreign-exchange fluctuations are poised to spike due to the unpredictable nature of a Trump candidacy and the prospect that global central banks will diverge in their pace of easing policy, strategists say. Volatility has plenty of room to increase as it’s currently hovering at the lowest level in two years, according to a JPMorgan Chase & Co. index.

“We expect the Fed to begin easing in May” and the “US election is set to be a source of volatility especially if Trump becomes the Republican candidate,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “Currency volatility has not been helped by central banks’ pushback on expectations for new easing cycles to commence imminently with the Fed on top of this list.”

Global currency volatility slid to the lowest since January 2022 on Monday, and has dropped about 45% from its peak in September of that year, according to the JPMorgan index. Foreign-exchange market swings have been blunted by a more resilient-than-expected US economy and well-telegraphed intentions by central banks to keep borrowing costs higher for longer.

Fluctuations in the currency market have largely been out of sync with those of bonds and stocks, which have been more volatile over the past year as central banks from the US to Australia embarked on their most aggressive policy tightening campaigns in decades. The lack of foreign-exchange volatility has dented corporate wallets as it crushed bets that make money when movements abound.

Those looking for more action may not have long to wait.

While the global inflation outbreak had been mostly synchronized on the way up, the conclusion of the tightening campaign may be less so, said Gareth Berry, strategist at Macquarie Group Ltd. in Singapore. Subtleties among economies are starting to reveal themselves, and the pace and timing of easing this year should show sufficient divergence to kick-start a volatility storm, he said.

Others also see a growing threat of higher volatility.

“The US presidential election is shaping up to be a risk event that could push up market vol,” said Carol Kong, a strategist at Commonwealth Bank of Australia Ltd. “But a Trump victory this year will not be as big a surprise to markets as it was in 2016. So the potential increase in FX vol may be more muted.”

(Updates to add additional quote in ninth paragraph. An earlier version of this story was corrected to remove a reference to higher hedging costs.)

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