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📝No Cyclical Or Geopolitical Risk Premium Left In VXY: J.P. Morgan Strategy

The overarching narrative for FX volatility in 2023 was the unwinding of last year’s risk-off, starting with the China re-opening mania of Q1 followed by periodic bouts of Fed pivot optimism that saw 2022’s extended USD length undergo a 180-degree reversal through the course of the year. The recession dog that did not bark this year left its imprint on vols more acutely than the dollar itself, showcased by their continued drift lower through the DXY revival of Q3 even as USD positions reversed.This was in part due to idiosyncratic circumstances surrounding two major currencies — JPY and CNH — that were capped within extremely narrow ranges by varying degrees of central bank / MOF jawboning and/or intervention. Whether this policymaker reaction function changes next year is anyone’s guess, but the net result is there is no trace of any cyclical or geopolitical risk premium left in the VXY, unlike at this time last year.

-J.P. Morgan FX Strategy


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