Despite the lack of headline volatility in FX (and elsewhere), there are still some underlying trends that were evident in the overnight trading session. The Aussie is the first stand-out, with the latest data on confidence and house lending supporting modest gains on the currency. AUDUSD is nudging the 0.9400 level, whilst AUDNZD continues to hold tight to the 1.10 level ahead of the RBNZ meeting tomorrow evening (European time). The other focus overnight has been the yen, which has strengthened back towards the 102.20 level on USDJPY. There was a sense last week that USDJPY was poised to break to the upside, but this latest move has put yen bears back into their place.
With regards to the lack of volatility, the FT is again focusing on this today. It’s been a growing theme over recent weeks, as the VIX has moved to early 2007 levels and measures of currency volatility have moved to mid-2007 levels. From some angles, there is a sense that it is the calm before the storm, given that historically such low levels of volatility have not tended to last for long and have been followed by a sharp increase. There is a fair deal of truth in the notion that the current conditions have been created by central bank policies, in other words low rates, forward guidance and ample liquidity. Central bank have worried about the potential problems that their exit strategies would create, but so far appear to have dug themselves into a bigger hole. Keep an eye on sterling today, with production data, but also the fact that they could be the first of the majors to put rates higher, quite possibly this year. The minutes to the June MPC meeting next week could well be the next step along this path, should we see at least one member vote for higher rates.