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May 30 - 12:55 PM

BofA: G10 FX Market Analysis – The 'Stuck in the Mud' Scenario

By eFXdata  —  May 30 - 10:45 AM

Synopsis:

BofA examines the current low-volatility environment in the G10 foreign exchange market, describing it as "uninspiring" and "stuck in the mud." The analysis highlights the contradiction in market expectations where participants desire both high carry and high volatility, which inherently conflict with each other.

Key Points:

  • Persistent Low Volatility: The G10 FX market is experiencing historically low levels of volatility, with major currency pairs trading within tight ranges despite recent USD fluctuations.
  • Market Expectations vs. Reality: Market participants have been hopeful for data-driven changes in the FX narrative, but such expectations have often led to disappointment, reflecting a "triumph of hope over expectation."
  • Dominance of Carry Trades: The focus on carry as a dominant strategy has contributed to dampening volatility. BofA emphasizes that high carry and high volatility are mutually exclusive—high carry typically implies a passive, less volatile market environment.

Conclusion:

BofA advises that in the current market scenario, where carry is the prevailing strategy, expectations for high volatility should be tempered. Traders and investors should adjust their strategies accordingly, embracing carry as a passive approach while exploring relative value (RV) trades, which continue to offer potential despite the broader market stagnation.

Source:
BofA Global Research

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