The global investor has enjoyed the bounce as well as the implosion of volatility. The problem with imploding volatilities is that after a while, developed markets implosion of volatility spreads to more emerging market type of risks. This volatility is often driven by investors hunting for yield, and often results in investors overlooking the real risks, and not only price “how much the market is moving”.
Below is the JPM EM FX index. It was one of the big drivers of risk off leading into the October sell off. EM currencies have traded rather “calm”, but lately some of the bigger sentiment currencies have started moving wildly. Note the EM FX index has started to see more volatility coming into the currencies.
As global vols came off hard since the Christmas panic, the implosion was also seen in Emerging market FXs. We have seen a spike higher over past session. The question is should EM FX vols be priced this low?
Below is a chart showing the JPM EM FX volatility index (white, inverted) versus the Emerging markets ETF, EEM US. Note how the spikes in FX vol has led to sell offs in the EEM US. Recently we have had a spike higher in EM FX vol, and sure the EEM US has come off small, but the question is, could EM FX volatility be the next “topic” for the markets to start focusing on.
Source; charts by Bloomberg