ZIRP, QE and Volatility of FX Markets
Dino Kos May 19, 2014
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FX Market Volatility: G10 vs. Emerging Markets JP Morgan FX Volatility Indices: G10 vs. Emerging Markets 35
ZIRP/QE1 begins Nov 25, 2008
30
Index Level
25
20
15
10
5
0
Jan-‐14
Jan-‐13
Jan-‐12
Jan-‐11
Jan-‐10
Jan-‐09
Notes: 1) Sources: Bloomberg 2) See appendix for data definitions
Jan-‐08
Jan-‐07
Jan-‐06
Jan-‐05
Jan-‐04
Jan-‐03
Jan-‐02
Jan-‐01
Jan-‐00
JPM G10
JPM EM
2
Emerging Markets Volatility Spread Versus G10
Notes: 1)  Sources: Bloomberg 2)  See appendix for data definitions
3
10
30
0 0
MOVE VIX
Jan-‐14 Jan-‐13
Jan-‐12 Jan-‐11 Jan-‐10 Jan-‐09 Jan-‐08
Jan-‐14 Jan-‐13 Jan-‐12
Jan-‐11 Jan-‐10
Jan-‐09 Jan-‐08 Jan-‐07
0
Jan-‐07 Jan-‐06
0
Jan-‐06 Jan-‐05
Jan-‐04 Jan-‐03
Jan-‐02 Jan-‐01
5
Jan-‐00
Jan-‐01
Jan-‐02
Jan-‐03
Jan-‐04
Jan-‐05
Jan-‐06
Jan-‐07
Jan-‐08
Jan-‐09
Jan-‐10
Jan-‐11
Jan-‐12
Jan-‐13
Jan-‐14
Jan-‐00
10
Jan-‐05
10 20
Jan-‐04
30
Jan-‐03
25
4 Notes: 1) Sources: Bloomberg, authors’ calculations 2) See appendix for data definitions
15 40
Jan-‐02
JP Morgan Global FX Volatility Index GSCI
Jan-‐01 Jan-‐00
Jan-‐14 Jan-‐13 Jan-‐12 Jan-‐11
Jan-‐10 Jan-‐09
Jan-‐08 Jan-‐07 Jan-‐06
Jan-‐05 Jan-‐04
Jan-‐03 Jan-‐02 Jan-‐01
Jan-‐00
50
100
Index Level
40
20
Index Level
50 20
150 50
Index Level
70
ZIRP/QE1 begins Nov 25, 2008 60
250 80
200 60
ZIRP/QE1 begins Nov 25, 2008 300
ZIRP/QE1 begins Nov 25, 2008 90
30
ZIRP/QE1 begins Nov 25, 2008 70
Rolling 60-‐day Annualized Historical Vol (percent)
Downward Trend in Volatility Across Asset Classes Since Start of ZIRP
ZIRP has dampened volatility on a global scale FTSE 100 Implied Volatility
EuroStoxx 50 Implied Volatility
ZIRP/QE1 begins Nov 25, 2008
90 80 60
Index Level
Index Level
70 50
40 30 20 10 0
ZIRP/QE1 begins Nov 25, 2008
100 90 80 70 60 50 40 30 20 10 0
Jan-‐13
Jan-‐14
Jan-‐12
Jan-‐13
Jan-‐14
ZIRP/QE1 begins Nov 25, 2008
120
100 Index Level
60
Index Level
Jan-‐12
Jan-‐11
Jan-‐10
Jan-‐09
Jan-‐08
Jan-‐07
Jan-‐06
Jan-‐05
Jan-‐04
70
Jan-‐03
Nikkei Implied Volatility
ZIRP/QE1 begins Nov 25, 2008
80
Jan-‐02
Jan-‐01
Jan-‐00
Jan-‐14
Jan-‐13
Jan-‐12
Jan-‐11
Jan-‐10
Jan-‐09
Jan-‐08
Jan-‐07
Jan-‐06
Jan-‐05
Jan-‐04
Jan-‐03
Jan-‐02
Jan-‐01
Jan-‐00
DAX Implied Volatility
50
40 30 20
80 60 40 20
10 0
0
Jan-‐11
Jan-‐10
Jan-‐09
Jan-‐08
Jan-‐07
Jan-‐06
Jan-‐05
Jan-‐04
Jan-‐03
Jan-‐02
Jan-‐01
Jan-‐00
Jan-‐14
Jan-‐13
Jan-‐12
Jan-‐11
Jan-‐10
Jan-‐09
Jan-‐08
Jan-‐07
Jan-‐06
Jan-‐05
Jan-‐04
Jan-‐03
Jan-‐02
Jan-‐01
Jan-‐00
Notes: 1) Sources: Bloomberg, authors’ calculations 2) See appendix for data definitions
5
QE Impact on Volatility Across Asset Classes MOVE
VIX QE1
Index Level
70 60 50
250
Taper begins
40 30 20
200
QE3 Taper begins
150 100 50
10 0 Jan-‐08
Jan-‐09
Jan-‐10
Jan-‐11
Jan-‐12
Jan-‐13
0 Jan-‐08
Jan-‐14
GSCI
50
Jan-‐11
Jan-‐12
30
QE3
25
Taper begins
40 30 20
Jan-‐13
Jan-‐14
QE2
QE1
20
QE3 Taper begins
15 10 5
10 0 Jan-‐08
Jan-‐10
Operation Twist
60
QE2
Index Level
70
QE1
Jan-‐09
JP Morgan Global FX Volatility Index Operation Twist
Rolling 60-‐day Annualized Historical Vol (percent)
QE2
QE1
Operation Twist
80
300
QE3
Operation Twist
QE2
Index Level
90
Jan-‐09
Jan-‐10
Jan-‐11
Jan-‐12
Jan-‐13
Jan-‐14
Notes: 1) Sources: Bloomberg, authors’ calculations 2) See appendix for data definitions
0 Jan-‐08
Jan-‐09
Jan-‐10
Jan-‐11
Jan-‐12
Jan-‐13
Jan-‐14
6
FX Volatility of Major Pairs: Historical Vs Implied
Notes: 1)  Sources: Bloomberg 2)  See appendix for data definitions
7