The volatility in some currency markets have moved beyond anything normally expected. The RBA intervened in the Aus currency markets to stabilize the market yesterday. This is all due to the unwinding of carry trades. In markets where carry has not be as active such as the Eur, the currency volatility increased but is still down relative to the longer-term levels of the last few years.
In those markets where carry was dominant, there has been a multiple increase in the level of volatility. In case of Aus and NZD, the short-term volatility has reached high teens which is greater than normal by a factor of 3. In non-carry markets, the increase is only 50-100%.
There will be a number of strong opportunities in these markets. The country fundamentals have not changed so the reasons for high interest rates are still present; consequently, the potential value from these trades still exists. Unfortunately, one of the new wild cards is the consumption beta story. The demand for low-yielders actually increases if there is greater threat of a recession. The higher volatility also requires a strong risk appetite. The return to risk from these trades have fallen significantly.
Until there is less uncertainty, there will not be a demand for these high yielders.
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