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Why Major Currency Pairs Are No Longer Volatile

By Crispus Nyaga

In recent weeks, the activities in the currencies market has been relatively calm. The lack of major movements has led posed a challenge to traders. This is because without the volatility, it is difficult to find opportunity. This problem was amplified yesterday when Goldman Sachs released its first quarter results. While the bank’s earnings beat analyst forecasts, its performance in the Fixed Income Currencies and Commodities declined by 11% in the quarter. This has seen the bank diversify its business to consumer banking, with the launch of the Apple Card product. The chart below shows the performance of the GBP/USD and EUR/USD pairs in recent weeks.

The reason for low volatility in the currencies market is easy to explain. In the United States, the Federal Reserve has said that it will not increase interest rates this year. There have been chatter that the bank could even cut rates this year. The dovish Federal Reserve has been met with other dovish central banks too. In Australia, the RBA said that it will likely cut rates if the unemployment rate rises. The Reserve Bank of New Zealand has reiterated the same.

In Europe, the ECB has said that the negative interest rates will continue to the end of the year. This was further than what the bank had guided previously. It had said that it will hike rates ‘at least through summer.’ In Switzerland, the SNB has been left with little options as the Swiss Franc has strengthened in recent days. In Sweden, the Riksbank has also abandoned the plans to hike rates. In the United Kingdom, the Brexit drama has left the economy more exposed to downsides. The ongoing delay in implementing Brexit has left the country at a more exposed position.

In Asia, the Bank of Japan has struggled to tighten the monetary policy. This is because while the country’s economy is doing well, it has not created enough inflation. With no inflation, it means that it will be impossible for the bank to raise interest rates. The same trend of low monetary policy has continued in other countries like South Korea and India.

In the emerging markets, the central bankers have been uncomfortable about raising interest rates. This is because of the weakening of the Chinese economy. The overall global economy is forecasted to decline this year. Therefore, central bankers in countries like South Africa, Brazil, and Russia have been forced to leave rates unchanged. The chart below shows the trend of the VIX indicator in the past one year.

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