The dollar and currency markets in general have been in a low volatility environment for an extended period. Trading opportunities have been infrequent and have been concentrated over short time periods. Periods of crisis like 2008 and 2020 caused large currency moves, but stability has generally ruled the markets.
However, currency stability may be coming to end. As Fed QE ends and QT begins, the transition will lead to more volatility as investors adjust to the new monetary world. This process is already starting globally with QT beginning with other central banks.
The new currency environment will be driven by several changes in global markets:
1. Low rates will be ending. The process may still be early, but rate differentials will widen as central banks reduce their stranglehold on rates.
2. Low and stable inflation environments will be ending. Even if some of the highs in inflation are reversed, inflation around the globe will be elevated and have greater dispersion.
3. Differentials in growth will increase. Growth rate differences have already increased and as policies change, growth differences will continue.
4. Similarity in central bank behavior is ending. Policy differences will increase especially in emerging markets.
5. The volatilities in traditional assets are moving higher.
6. Policy uncertainty is increasing as countries choose different policy paths to meet their circumstances.
Policy and economic differences will raise opportunities across all currency markets.
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