COMMENT-Interest rates increasingly important for currencies — TradingView News

Quiet currency markets are becoming quieter, heightening the importance of interest rates in determining the direction of currencies.

EUR/USD, which is the most heavily traded currency pair and therefore more likely to have a bigger influence on wider currency markets, traded in one of the smallest annual ranges last year and looks set to trade similarly this year.

Volatility expressed by currency options has tumbled this month to its lowest point in more than two years with one-month EUR/USD vol falling below 5.0.

Only a few short periods have been spent at such low levels since the single currency’s inception.

The slowdown in activity in FX markets is occurring when many equity markets are booming and ahead of anticipated easing cycles that may fuel the current will to take greater risks.

Quiet conditions coupled with robust risk appetite are the two elements likely to fuel demand for carry trades for which the dollar and its underlying interest rate – currently 5.5% – are the benchmark.

Currencies undermined by lower rates may come under more pressure while those with rates in excess of the U.S. may draw investors.

Currencies that are free-floating may do better than those that are not, but the longer this quiet spell holds, the greater the will to gamble will become, heightening demand for those that are restricted – if they are supported by a very high interest rate.

Vols for some usually risky but high-yielding currencies like India’s rupee, Indonesia’s rupiah and Turkey’s lira have collapsed, which should heighten their appeal.

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Thomson ReutersSlump in volatility

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