Why currency volatility could make a comeback

FOREIGN-EXCHANGECVIXVIXSP markets were once a hotbed of lively, speculative activity. But today traders seeking an adrenalin fix must turn to assets like cryptocurrencies instead. Barring a brief surge early in the pandemic—and isolated goings-on in the Turkish lira—currency markets have gone quiet. Macro-trading funds no longer strike fear into central bankers and finance ministries with speculative attacks. The last sudden end to a major currency peg—that of the Swiss franc in 2015—was a result of the central bank taking investors by surprise, rather than the other way round.Rock-bottom inflation and interest rates over the past decade helped smother swings in exchange rates. Deutsche Bank’s index, a gauge of forex volatility, has been above its current level more than 90% of the time over the past 20 years. By contrast, the , which measures expected volatility for America’s & 500 index of stocks and is often used as a measure of overall market sentiment, has so far spent October at roughly its long-term average. But as consumer prices and interest rates go up, currency volatility could well stage a return, with potentially unwelcome consequences for some investors.