Currency volatility falls to a three-year low, and carry trades rebuild
Realised volatility across the majors is near the bottom of its range. That has a predictable effect on positioning.
Realised volatility across major currency pairs fell to its lowest in three years. Implied volatility, what the options market charges for insurance, followed it down.
Low currency volatility has one reliable consequence: the carry trade becomes more attractive, and more capital flows into it.
The mechanics of carry
Borrow in a currency with low interest rates, convert, and hold assets in a currency with higher rates. The profit is the rate differential, and it accrues steadily as long as the exchange rate does not move against you.
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