The prospect of a potential showdown between Donald Trump and Joe Biden, along with the Federal Reserve’s anticipated interest rate cuts, is poised to inject volatility into the $7.5 trillion-a-day currency market. Analysts predict that foreign exchange fluctuations will intensify due to the unpredictable nature of a Trump candidacy and the likelihood of divergence among global central banks in their approaches to monetary policy easing. Currently, volatility sits at its lowest level in two years, according to a JPMorgan Chase & Co. index, leaving ample room for escalation.
Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney, commented, “We expect the Fed to begin easing in May,” and noted that the “US election is set to be a source of volatility especially if Trump becomes the Republican candidate.” He added, “Currency volatility has not been helped by central banks’ pushback on expectations for new easing cycles to commence imminently with the Fed on top of this list.”
Global currency volatility reached its lowest point since January 2022 on Monday, having declined approximately 45% from its peak in September of that year, according to the JPMorgan index. The subdued nature of foreign exchange market swings is attributed to the resilience of the US economy and the transparent intentions of central banks to maintain higher borrowing costs for an extended period.
While bonds and stocks have experienced heightened volatility over the past year amid aggressive policy tightening campaigns by central banks, fluctuations in the currency market have remained subdued. This discrepancy has impacted corporate finances, diminishing profit opportunities from movements in exchange rates.
Analysts anticipate a shift towards higher volatility in the near future. Gareth Berry, strategist at Macquarie Group Ltd. in Singapore, remarked that while the global inflation surge was largely synchronized on the way up, the conclusion of the tightening campaign may see less uniformity. Differences among economies are becoming apparent, and the varying pace and timing of easing expected this year could ignite a volatility storm.
Carol Kong, a strategist at Commonwealth Bank of Australia Ltd., also highlighted the looming risk of increased volatility, particularly surrounding the US presidential election. However, she noted that a potential Trump victory may not surprise markets as significantly as it did in 2016, potentially tempering the magnitude of the increase in FX volatility.
