The foreign exchange market Snoozefest can not last

It is quiet in foreign exchange markets. Maybe too quiet.

All actions have been on stocks this year, as any boring currency trader will tell you. The market is usually a hub for fierce retail, but has largely been quiet during the meme-stock phenomenon.

The risk of an increase in exchange rate volatility is something worth considering for investors with exposure abroad as well as for corporate treasurers.

Equities are usually more volatile than currencies. But the gap between the Cboe Volatility Index – the well-known VIX “fears” it measures volatility of S&P 500 options – and the Cboe EuroCurrency Volatility Index, which does the same for euro-dollar options, is large by recent history standards. The same applies to volatility in other currency pairs.

The trend is relatively new. For most of the last decade, stock market volatility and exchange rates have been lower and lower in tandem with occasional increases. But after markets began to recover from last year’s pandemic-induced sell-off, the situation was disrupted: Exchange rate volatility resumed its decline, but stock market volatility settled on a higher plateau.