Forward Guidance & Market Volatility

[Purple Brain]

With many developed world countries' central banks now providing forward guidance I wondered if this would be a factor in dampening down volatility. My perspective is primarily forex, but I understand there is a general reduction in volatility across all asset classes.

The professional money will presumably have fewer surprises and shocks with regard to interest rates and money supply and therefore will be able to manage their portfolios in a far more orderly manner than has hitherto been possible. Is this a reasonable assessment?

If it is, does it make sense – as a currency trader – to be looking to trade pairs for which one element is a currency from a more exotic and less orderly neighbourhood where forward interest rates are still a thing of mystery? I’m thinking Mexican Peso (MXN) or Brazilian Real (BRL) by way of example.

The spreads will presumably reflect the nature of such pairs, but even so it appears comfortably tradeable given the trending nature of instruments. I can only get data for the usd/mxn from OANDA as they don’t provide any BRL pairs – which is strange as they quote against majorly exotics like the Thai Bhat – but wondered if anyone had a view on this or has even been actively trading forex in these types of pairs?

 

[Martinghoul]

Well, given your premise of lower volatility in certain mkts, I don't see what the trade is in outright FX that can take advantage of it. I mean I would understand if you wanted to trade some options on the back of this, but straight EM/DM crosses? Don't really see the logic, tbh...

 

[Purple Brain]

No I wasn’t suggesting taking advantage of the lower volatility with an outright directional FX trade. I imagine selling straddles would handle that quite nicely.

What I was saying was because of the lower volatility on pairs where both were of countries currently having central banks providing forward guidance; where else could one look for higher volatility. Currencies for countries with high interest rates (Brazil comes to mind) might offer a more strongly trending currency trade than any combination from the currently moribund major-8 market.