Three months implied volatility in EUR/USD currently trades at 6 years low just above 7%,which means implied volatilities in the FX market have not been this low since October 2007. However, in contrast to before the financial crisis low implied volatilities are reflected in lowrealized volatilities this time. The low levels of implied and realized volatilities should howevernot be viewed as an expression for low uncertainty but rather the opposite. Anecdotalevidence suggests FX market activity is falling, which means low volatilities are rather anexpression of frustration among investors and capitulation. We regard it being linked touncertainty caused by the political crisis in Washington. Moreover uncertainty about futuremonetary policy probably also contributes after the Fed surprised financial markets by leavingpolicy unchanged in September. There is of course a chance FX market activity could pick upagain on the back of a near-term resolution in Washington. On the other hand we arecurrently well into the last quarter and appetite for loading on new risk this close to year-end,with uncertainty about the impact on economy of the government shutdown and the risingrisk of a default, is probably limited among market players. Hence, although FX marketvolatilities may appear low one should not forget this reflects limited moves in exchange ratesand low conviction, which is hard to see just going away even with a resolution to the UScrisis.
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