Let’s hope the Australian dollar does not evolve into a funding currency. That would make it pro-cyclical over time. I doubt it. RBC with the note.
Looking for efficient carry trades
Looking for efficient carry tradesBroad FX volatility got a brief boost from the large moves around the June FOMC meeting, but with the exception of the days in the run-up to that meeting, implied vol is at post-pandemic lows and only slightly above the record lows that preceded the onset of COVID-19. FX volatility is at an unusually large discount to vol in other asset classes (Figure 1). In the medium-term, we think there are structural forces keeping volatility in FX at low levels. And even in the near-term, it seems likely markets will revert to trading tight ranges now that the step adjustment in US rate prospects has happened post-FOMC. Although the Fed clearly signalled that the markets’ assumption that data did not matter was wrong, the hurdle is high for data moving rate expectations further, given the ongoing pandemic/reopening distortions.
