News & Analysis

Realised and implied volatility has plummeted in most Asian currency pairs in recent months, a trend that has been perpetuated by quasi-pegs in USDCNY, USDINR, and up until recently, USDJPY. While recent history suggests that volatility should persist at current low levels ahead of any eventual Fed rate cuts, given that markets have been wrongfooted twice in the past eight months predicting the possible timing for Fed easing, we think implied and realised volatility across a multitude of Asian currency pairs should rise back close to recent averages ahead of the Fed’s June meeting. In the past two weeks we’ve seen some evidence of this. Domestic factors have returned as primary drivers for some currencies like JPY, MYR, and THB, while the PBoC has also sought to capitalise on a weaker dollar by exhibiting a renewed preference for a stronger yuan. Furthermore, we think markets are likely to trim short-positions in Asian currencies more broadly ahead of the Fed’s June decision. Though we generally expect traders to be hesitant shorting the dollar outright at this juncture, market preferences should shift in favour of valuations and relative growth differentials, characteristics found in near-abundance across Asia. In combination with mounting expectations of BoJ normalisation this month, a combination of domestic and market factors should drive higher volatility broadly across the region, albeit for some currencies this only looks likely to come only once the Fed is comfortably into its easing cycle.

Read our March 2024 Asian FX Update here:

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Authors: 
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst

 

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