Stressed FX Markets – Nomura
Bilal Hafeez, Research Analyst at Nomura, suggests that if we rewind to
the middle of February and markets were in turmoil and the S&P500
was plummeting to two-year lows, credit spreads were exploding higher
and oil was testing $25 a barrel.
Key Quotes
“Fears of a Chinese hard-landing, European bank instability and the
reverberations of the Fed’s December hike – its first in almost 10 years
– were engulfing the market.
Fast-forward to today and that period seems like a distant memory.
Admittedly, the Bank of Japan did provide another market shock by not
easing in late April, but it does not appear to have been enough to tip
markets back to those dark days in February. Indeed, if we look at an
array of risk measures from equity volatility to credit spreads we find
that the bulk of them are not too far away from their one-year averages.
In February, they were all over two standard-deviations above the
average.
The one measure that is still in elevated risk or “stressed” mode is FX
volatility. While it has fallen in recent months, it remains one
standard-deviation above its one-year average. Other measures such as
credit spreads have been on a steady decline. Part of this is that the
EU referendum in the UK is on the horizon which FX markets are most
sensitive to, but also it suggests that FX is perhaps the lightning rod
for all risk. If there’s a tremor anywhere, FX markets will likely take
notice.
The implication of this is that only when nerves in FX markets subside
can we have any confidence that the instability is behind us. Until
then, markets are likely to remain skittish on whether risk is on or
off.”
