Graphic content; Markets are pricing in an end to currency wars. We’re not so sure.

Jack Norris
Written by

16th April 2019

Rates and Foreign Exchange (FX) markets have recently taken a divergent view on the global economic outlook. While the US yield curve recently began signalling that a recession may be on the horizon, currency markets are pricing the lowest amount of volatility ever – near to or below the record lows seen in 2007 and 2014. Below we’ve plotted the 1-year option implied volatility across a few popular FX pairs, as well as JPMorgan’s index of global FX volatility (which is based on an aggregate of option implied volatility of currencies globally).

Currency wars were previously the last round of ammunition for central banks confronted with a severe slowdown, when rates were already at or through the zero bound. Given that ongoing lethargic growth has meant a failure for most of the world to build up much of an interest rate war chest, it won’t take much of an economic slowdown to bring about the next currency war.

Perhaps the latest signs of economic growth and hopes of Chinese reflation are deemed by the market to outweigh the possibility and consequence of a US recession. Perhaps markets have sufficient trust in central banks’ forward guidance to believe that interest rate expectations will not move over the next year. Or more likely, perhaps the goldilocks environment (reasonable growth, low inflation) has once again made markets complacent.

Implied FX volatility worldwide is near record lows
Implied FX volatility worldwide is near record lows
Source: Bloomberg, 01/01/2007-12/04/2019.

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance is not a reliable indicator of future results. This is a marketing communication issued by Allianz Global Investors GmbH,, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht ( Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London, EC2M 3TY,, which is subject to limited regulation by the Financial Conduct Authority ( Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.