Implied volatility across asset classes has receded in recent months as the barrage of global systemic risks (US-China trade war, disorderly Brexit and the manufacturing slowdown) has dissipated. Even though FX vol, along with other asset volatilities, remained remarkably subdued in the wake of the US drone attack, investors should not become too complacent. With that in mind and given the structural nature of many economic and political risks (rising inequality, populism, trade conflicts etc), vol levels look increasingly enticing from a left-tail perspective. FX vol, in particular, appears attractive given that currencies serve as a crucial pressure valve during period of economic and political instability.

Implied vol against the USD across nearly all major currencies has fallen over the last year and now trades close to the lows. Turkey stands out given the extreme range, but at 15 vols, pricing adequately reflects the improvement in fundamentals alongside lingering economic and political risks. GBP vol is arguably a more enticing prospect given the uncertainty around Brexit impacts, the new end-year EU-UK trade deal cliff edge and the UK’s high exposure to global risk sentiment.

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Source: Bloomberg, Macrobond, Variant Perception