STOCKS | Low FX Volatility Becomes the New Normal, but Risks Are Building

Foreign exchange volatility has stayed so low for so long that traders are starting to treat it as a new normal rather than a temporary phase. According to Sina Finance, the low-volatility environment was one of the main topics for the second straight year at an annual industry conference in Amsterdam this week. Investors said the market has struggled to sustain large currency swings even when bonds, oil prices, and geopolitical conditions move sharply. Harish Neelakandan, co-chief investment officer at systematic trend-following fund AlphaEngine Global Investment Solutions, said currency volatility is undergoing a long-term structural decline and that traders must adapt. For the foreign exchange market, which averages $9.6 trillion in daily trading volume, the lack of volatility is becoming a long-term problem, especially for traders who profit from large currency moves. But asset managers and companies that hedge their exposures may benefit from a calmer market. Neelakandan said closer coordination among central banks has helped suppress currency swings, while geopolitical shocks often produce only brief spikes in volatility. Unless that backdrop changes fundamentally, traders are likely to keep treating such spikes as opportunities to short volatility again. Thomas Carreau, foreign exchange portfolio manager at CN Investment Division, said the market is now seeing a "nothing will happen" trade, with investors continually selling volatility. He said recent yen moves have still been relatively limited, even after the currency fell to a 40-year low before joint U.S.-Japan intervention in the foreign exchange market triggered several sharp rebounds. Carreau also said carry trades remain strong. He prefers dollar-neutral carry trades because U.S. President Donald Trump's social media posts can still cause small daily moves in the dollar. He said the strategy works well in a low-volatility environment. Harel Jacobson, assistant portfolio manager at Capstone Investment Advisors, said lower volatility forces traders to take larger positions to earn the same return, which increases portfolio risk when rare large moves occur. He said his fund often buys cheap hedges to protect against unusually violent market swings, citing last year's Taiwan dollar surge as the kind of event it seeks to guard against. Allan Guild, chairman of the conference and director at Hilltop Walk Consulting, said low volatility is not bad for everyone and may reflect ample liquidity and efficient functioning in the foreign exchange market, even when the outside world remains turbulent.