FX Markets Lull Draws Traders Into a Bet That Went Awry in 2020
- Selling volatility is now becoming a favorite with hedge funds
- A key risk to the trade is that realized fluctuations widen
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Once again, currency traders are starting the year by loading up on bets for lower volatility. But it’s already beginning to look a bit too one-sided to last.
In a repeat of an option-market pattern seen since 2017, investors are showing a clear preference for shorting volatility early in the year. The reasoning appears to be the same now as it was then: central banks are expected to refrain from changing their policy mix and to continue with accommodative biases, helping keep currencies in tight ranges over the medium term.