Volatility in the US$5.1 trillion-a-day foreign-exchange market is down, but not out, UBS AG said.
Currency swings are expected to increase later this year as investors weigh the potential outcome of the US presidential election and the likelihood of a US Federal Reserve year-end interest-rate increase.
The predicted volatility resurgence follows a period of calm that started in July, after traders absorbed the initial shock of the UK’s Brexit vote.
A JPMorgan Chase & Co gauge of currency volatility fell to a two-week low this week.
“Once it gets closer to the election and the call gets closer on who will be the next president, volatility should rise from currently rather low levels,” said Constantin Bolz, a foreign-exchange strategist at UBS’s wealth management unit in Zurich.
It has been a year of ups and downs for the US dollar on mixed signals from policymakers amid prospects for Fed monetary tightening.
The US central bank scaled back its outlook for interest-rate increases this week, further dimming the outlook for the greenback, which has declined almost 4 percent this year.
And with the US presidential election only about six weeks away, investors are speculating about what the outcome would mean for the currency market.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, dropped 0.6 percent this week as traders digested the Fed announcement and the Bank of Japan’s move to a more flexible approach to expanding stimulus.
The greenback fell 1.2 percent to ￥101.02, and weakened 0.6 percent to US$1.1226 per euro.
The JPMorgan Global FX Volatility Index, a gauge of expected swings in the currency market, climbed to 9.9 percent on Friday, while remaining below its 10.7 percent average this year.
It has stabilized in recent months after it reaching a four-month high just before the UK decision in June to leave the EU.
US Democratic presidential nominee Hillary Rodham Clinton and US Republican presidential nominee Donald Trump are to hold their first televised debate on Monday as part of the run up to the Nov. 8 election.
“We have a strong view that volatility is going to pick up toward year-end,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co.
TAIPEI
In Taipei, the New Taiwan dollar rose against the greenback on Friday, gaining NT$0.07 to close at NT$31.330 after moving in a quiet session without fresh indications for traders, dealers said.
The US dollar on Friday traded in a narrow range against the Taiwan dollar, but saw some selling toward the end of the session as traders took cues from foreign institutional buying in local equities, the dealers said.
The greenback opened at NT$31.400 and moved between NT$31.310 and NT$31.437 before the close. Turnover totaled US$526 million during the session.
The flat opening continued within a small trading range, as many currency traders stayed on the sidelines for more clues on how to map out their investment strategies, the dealers said.
After a plunge earlier this week, the US dollar became more stable on Friday, as traders settled down following the Fed’s decision, they said.
Even before the decision, foreign investors had started to move funds into the region to boost the NT dollar and other regional currencies, the dealers said.
Investors need more incentives to trade as they wait for more economic data from the US, they said.
The NT dollar got a boost from continued foreign institutional buying in equities to close higher against the US dollar, the dealers added.
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