Bank of America strategists anticipate heightened volatility in currency markets throughout the year as the Federal Reserve embarks on interest rate cuts. To navigate potential market turbulence, they advise clients to consider purchasing foreign exchange (FX) options, emphasizing that these options will gain value in response to more significant market swings. Notably, the strategists, including Bruno Braizinha, highlight an unusual gap between the ICE BofA MOVE index, which measures Treasury market volatility, and CVIX, tracking expectations for currency swings. They argue that these two indexes are likely to converge.
In a note to clients, the strategists express the view that the traditional role of interest rates as the primary shock absorber in the market may diminish in 2024 as the Federal Reserve initiates policy easing. They suggest that FX volatility could assume a more prominent role, indicating a potential shift in market dynamics.
Given the relatively subdued nature of currency markets, options on FX pairs are currently considered cost-effective, making them an attractive choice for investors seeking to hedge their portfolios against potential market fluctuations. The strategists at Bank of America also highlight that FX volatility typically rises when the Federal Reserve begins cutting rates, emphasizing the need for investors to protect against potential risks associated with the US election.
The strategists conclude by suggesting that clients have an opportunity to implement protective measures in the relatively affordable space of FX volatility. This recommendation aligns with the expectation of increased market volatility as the Federal Reserve adjusts its interest rate policy and the potential for unforeseen events, such as those linked to the US election, to impact currency markets.
