FX Flash
Group Economics Macro & Financial Markets Research
23 September 2016
FX market back to slumber? FX volatility expectations decline post Fed, BoJ event risks
Roy Teo
Monetary policy divergence: AUD/NZD recovering
Senior FX Strategist Tel: +65 6597 8616
Chinese yuan steady ahead of SDR inclusion on 1 October 2016
roy.teo@sg.abnamro.com
FX volatility expectations decline post Fed, BoJ event risks Volatility expectations in the currency markets have declined as global central banks are unlikely to announce changes to their monetary policy bias over the next one month. One month EUR/USD implied volatility has plunged to the lowest level since late 2014. In Asia, volatility expectations in Asian currencies and the AUD/USD have also declined, though at a more moderate magnitude. DM FX volatility expectations decline One month implied volatility index
Monetary policy divergence: AUD/NZD recovering Level
350 330 310 290 270 250 230 210 190 170 150 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
%
1.15
0 -0.4
1.10 -0.8 1.05
-1.2 1.00 Jan-15
-1.6
May-15
AUD/NZD (lhs)
DM implied vol index
Source: Bloomberg, ABN AMRO
Sep-15
Jan-16
May-16
Sep-16
2y AU-NZ yield spread % (rhs)
Source: Bloomberg
Monetary policy divergence: AUD/NZD recovering The AUD has outperformed the NZD in the past week as financial markets are coming to terms that the Reserve Bank of Australia (RBA) is likely to keep monetary policy unchanged this year, while another 25bp rate cut is still expected in New Zealand. Earlier this week, RBA governor Lowe said that the RBA is not an ‘inflation nutter’ and some degree of variability in inflation is inevitable and appropriate. This has raised the hurdle rate of policy easing in the coming months even if inflation in the third quarter remains below the RBA’s 2-3% target range. On the other hand, the
Insights.abnamro.nl/en
2
FX Flash - FX market back to slumber? - 23 September 2016
Reserve Bank of New Zealand reiterated that further policy easing will be required to ensure that future inflation settles near the middle of their target range. As monetary policy divergence in Australia and New Zealand is not fully priced in by financial markets, it is likely that AUD/NZD will continue to grind higher towards 1.07 in the coming weeks. Chinese yuan steady ahead of SDR inclusion on 1 October 2016 In the past month, the Chinese yuan (CNY) has remained remarkably steady against currencies of China’s main trading partners and against the US dollar. This is due to an improvement in economic data releases in China and China’s policy makers objective to smooth volatility in the CNY. The CNY inclusion in the IMF SDR basket is expected to be effective on 1 October 2016. The State Administration of Foreign Exchange (SAFE) recently reaffirmed our view that inflows are unlikely to be big due to CNY inclusion in the SDR basket. Nevertheless, the SDR inclusion is likely to boost confidence in yuan assets. We expect the CNY to trade around the 6.70 and 6.80 level against the USD at the end of the third and fourth quarter of this year respectively.
CNY TWI steady in the past month
USD/CNY price action likely to remain subdued
Index level
Level
107
6.80 6.75 6.70 6.65 6.60 6.55 6.50 6.45 Jan-16
105 103 101 99 97
95 93 Dec-14
Jun-15
Dec-15
10 9 8
7 6 5
4 Apr-16
Jul-16
3mth USD/CNY NDF outright (lhs)
Jun-16
3mth USD/CNY volatility expectations (rhs)
CNY Index
Source: CFETS, ABN AMRO
Implied volatility
Source: Bloomberg
Oct-16
3
FX Flash - FX market back to slumber? - 23 September 2016
Find out more about Group Economics at: https://insights.abnamro.nl/en/
DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purpose s than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in th e document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Š Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").
4
FX Flash - FX market back to slumber? - 23 September 2016