(Bloomberg) -- When in doubt, buy volatility.
The old adage is holding strong, even as currency traders respond to shifts in sentiment in apparently conflicting ways. However else the currency market reacts, bets that there will be price swings look appealing.
That’s helped a gauge of volatility in the major currencies reach its highest level this week in nearly two months, as investors seek ways to factor in the coronavirus outbreak and growing risks of a technical recession in Italy and Japan.
It comes as new doubts over traditional correlations between market havens and risk appetite have encouraged investors to take cover through options trades. These help even when assets known for their safety, such as the yen, defy their reputations by falling during wider moves away from risk. Similarly, the dollar has recently bucked established trends in its relationship with U.S. Treasuries at times, by rising when yields on the bonds fall.
These unusual patterns might prove fleeting, but while they are occurring, it makes sense for traders to go with the rising tide of higher volatility in the currency market.
The cost of hedging the euro over a one-week period has reached its highest in four months, while buying volatility on the one-year tenor costs the most since early October. As the questions on what risk-off trading now actually looks like, volatility in dollar-yen is at multi-month highs across the curve.
Volatility Is Another Call Currency Traders May Have Got Wrong
At the same time, currency volatility gauges are beginning to track their counterpart for interest rates, in an about turn after decoupling for the better part of 2019. If that correlation holds, as long as efforts to price the next moves by the world’s major central banks remain a two-way trade, hedging the moves in the major currencies could become a costly exercise.
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice