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30 Jun 2014
End of QE could bring volatility back to FX market - Commerzbank
FXStreet (Córdoba) - Ulrich Leuchtmann and Michael Schubert, analysts at Commerzbank commented that low volatility in FX market and ultra-easy monetary policies can be linked by two factors: 1)forward guidance protects against economic data surprises and 2) QE makes funding easier for issuers. However, they expect volatility to pick up over the next months as banks start to normalize their policies.
Key Quotes
“Little is happening on financial markets. This might be attributable to a summer slump.
But in fact the volatility in asset prices and exchange rates has declined progressively since autumn 2012”.
“We show that this fall is mainly due to ultra-expansionary central bank monetary policy, which is inflating asset prices and has had the side effect of depressing volatility. The longer this situation lasts, the more susceptible does the market become to price fluctuations and the more likely are sudden price spikes”.
“If at least some major central banks start normalising monetary policy (which is foreseeable at least for the Fed and BoE), this will remove some of the grounds for current very low volatilities: Forward guidance will no longer apply and the prices of financial products will again react to macro data”.
“Moreover, the end of QE will lead to more uncertainty in the funding of businesses and governments, resulting in more volatility for their equities and bonds”.
“These could happen as early as in autumn, when the Federal Reserve ceases its asset purchases and speculation about higher US key rates begins to intensify”.
Key Quotes
“Little is happening on financial markets. This might be attributable to a summer slump.
But in fact the volatility in asset prices and exchange rates has declined progressively since autumn 2012”.
“We show that this fall is mainly due to ultra-expansionary central bank monetary policy, which is inflating asset prices and has had the side effect of depressing volatility. The longer this situation lasts, the more susceptible does the market become to price fluctuations and the more likely are sudden price spikes”.
“If at least some major central banks start normalising monetary policy (which is foreseeable at least for the Fed and BoE), this will remove some of the grounds for current very low volatilities: Forward guidance will no longer apply and the prices of financial products will again react to macro data”.
“Moreover, the end of QE will lead to more uncertainty in the funding of businesses and governments, resulting in more volatility for their equities and bonds”.
“These could happen as early as in autumn, when the Federal Reserve ceases its asset purchases and speculation about higher US key rates begins to intensify”.