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Currency volatility declined by the most since 1999 this quarter, with JPMorgan Chase & Co.'s index of implied volatility on dollar options against the euro, the yen, the British pound, the Swiss franc and the Australian and Canadian dollars falling 2.38 percentage points to 10.11 percent. It's the biggest drop since the second quarter of 1999, according to Bloomberg data.
Diminished price swings are a sign to Goldman Sachs Group Inc., Mizuho Corporate Bank Ltd. and Australia & New Zealand Banking Group Ltd. that central banks will avoid intervening in foreign exchange even after the dollar depreciated 25 percent against its biggest trading partners in the past five years.
Currency swings were muted after finance ministers from the Group of Seven nations said on April 11 they were concerned about the impact of “sharp fluctuations in major currencies'' and the “implications for economic and financial stability.''
“I thought that around $1.60 we were getting close'' to intervention, Jens Nordvig, a strategist with Goldman Sachs in New York, said of the possibility central bankers would buy and sell currencies to influence exchange rates. “But after the recent events I would say we're not getting close until we reach $1.65.''
“More players are warming up to the idea that the dollar will remain in a range,'' said Ryousei Ishida, senior vice president of foreign exchange options in Tokyo at Mizuho, a unit of Japan's second-largest publicly traded bank. The outlook is spurring traders to use strategies that benefit when currencies are little changed, he said.
The median estimate of 46 strategists surveyed by Bloomberg is for the dollar to trade at $1.54 per euro by Sept. 30. The median yen forecast is 104 per dollar, compared with last week's closing price of 106.13.
Some traders are buying “double-no-touch'' options to bet the dollar will be little changed against the yen, Ishida said. Another strategy is to sell “straddles'' with strike prices near the current level in the spot market as they would benefit from a further decline in volatility, he said.
A double-no-touch pays the buyer a fixed amount should the underlying currency remain between two levels during the life of the option. A straddle is a call and put with the same strike price and duration. Calls grant the right to purchase currencies, while puts allow sales. The strike price is where an option may be exercised.
Finance ministers and central banks object to rising volatility because it complicates the assessment of economies, interferes with monetary policy and gives companies little time to adjust by cutting costs. The dollar's plunge also contributed to rising prices for raw materials that sent oil, copper and iron ore to record highs.
