FX markets casual approach to global trade war risks - ING

While the prospect of a trade war has leapt to the number one risk for global investors following China’s swift retaliation to US tariffs, FX markets have taken on the role of a casual observer, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“We note that while the average change in the VIX index on noisy trade war days has been 1.5 standard deviations higher than the norm, changes in global FX volatility have been pretty much in line with historical averages (changes in EM FX volatility have been 0.6 standard deviations higher).”

“The ever-changing trade war narrative – coupled with the limited fundamental economic fallout under the current tit-for-tat US-China tariff proposals – means that it’s easy to see why currencies have not been the preferred investment vehicle to speculate on rising trade tensions. Indeed, this Cold Trade Conflict will most likely need to heat up in order to spillover over into the currency arena.”

“Expect FX markets to stay directionless, with the bias towards buying protectionist havens like the JPY as trade war risks remain a Trump matchstick away from flaring up.”