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ZIRP, QE and Volatility of FX Markets

Dino Kos May 19, 2014

www.cls-group.com

® CLS and the CLS Logo are registered trademarks of CLS UK Intermediate Holdings Ltd © 2014 CLS UK Intermediate Holdings Ltd.


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


Zirp and market volatility