"Calm" Becomes the New Normal in the Forex Market: Selling Volatility, Doing Carry Trades, but Institutions Warn a "Time Bomb" May Have Been Planted

At the TradeTech FX 2026 annual industry conference in Amsterdam, the prolonged slump in currency volatility dominated the agenda for a second consecutive year. What attendees described was a market where dramatic shifts in bonds, crude oil and geopolitics still fail to drive lasting moves in exchange rates. "What we lament is the long-term downward trend in FX volatility," said Harish Neelakandan, co-chief investment officer at systematic trend-following fund AlphaEngine Global Investment Solutions. "This is the hand we've been dealt. We just have to learn to live with it." For a market with daily trading volume of $9.6 trillion, the absence of volatility is becoming a year-after-year headache for traders who count on big moves to make a living. But this calmer environment is probably good news for asset managers and corporates looking to hedge their exposures. According to the organizer's website, the conference was held Sept. 15-17 at the Mvenpick Hotel in Amsterdam, drawing more than 800 attendees, including over 300 buy-side and corporate representatives. Central Bank Coordination Suppresses Volatility, Shocks Leave Only Pulses Neelakandan said greater coordination among central banks has helped contain FX volatility, allowing geopolitical shocks to produce only brief pulses of volatility. Unless this backdrop changes fundamentally, traders are likely to keep treating such pulses as opportunities to short volatility again. "What we're seeing is the 'nothing's going to happen' trade, where people just keep selling volatility," said Thomas Carreau, currency portfolio manager at CN Investment Division, which manages the pension plan of Canadian National Railway. Carreau said even the yen's recent moves have been relatively restrained. Over the past few months, the yen has been the market's focus: it first slid to its weakest level in four decades, then a joint U.S.-Japan intervention drove a string of sharp rallies. Even so, its volatility level remains in the historical tail. The yen briefly broke below 160 in late July, approaching 164 per dollar, a new low since 1986; on July 30, Japan's Ministry of Finance, and on July 31, the U.S. Treasury via the New York Fed, successively sold dollars and bought yen in the market, and on Aug. 3, Japanese Finance Minister Satsuki Katayama and U.S. Treasury Secretary Scott Bessent jointly confirmed this was the first joint yen-buying operation between the two countries since 1998. Data from Japan's Ministry of Finance show that from July 30 to Aug. 26, the Japanese government deployed a total of 15.4 trillion yen (about $96.4 billion) for market intervention, a record for a single month. The intervention initially showed clear results, with the yen quickly rebounding from around 164 and briefly rising to 155.20 on Aug. 3, but the boost failed to sustained gains on Aug. 31 the yen fell below 160 again, and only on Sept. 8 did it strengthen back to 152, with the dollar closing at 156 yen in New York that day. A joint intervention worth nearly $100 billion ultimately pulled the exchange rate back to near its starting point. In addition, advances in electronic and algorithmic trading are seen by some market participants as suppressing volatility, and some warn that the lack of sharp moves will drive market makers out because of the difficulty in profiting. "Carry Is King" Carreau added that carry trades where investors borrow in low-yielding currencies and buy higher-yielding assets continue to perform well. He prefers to structure such trades as dollar-neutral, because U.S. President Donald Trump's social media posts can still trigger small intraday swings in the dollar. It is a strategy that performs well in a low-volatility environment. "Carry is king," he said. His judgment aligns with the overall shape of this year's FX market. Recently, unexpectedly low volatility across asset classes has pushed investors into carry trades, giving this most enduring of FX bets its best run in decades; data show that a strategy recommended by strategists at institutions including Citigroup borrowing in euros and buying a basket of the Brazilian real, Colombian peso and Turkish lira was up about 18% year-to-date through mid-July, the biggest year-to-date gain since 2005. Low volatility is also rewarding carry traders more broadly: at the start of this year, JPMorgan's volatility index showed that emerging-market currency swings had been below those of Group of Seven currencies for nearly 200 consecutive days, the longest streak since 2008. Sell-side firms have also translated low volatility directly into strategy. In May, Deutsche Bank's FX strategy team led by George Saravelos advised traders to shift focus away from the dollar toward relative value in FX crosses; Wells Fargo analysts led by Alvaro Vivanco recommended buying the South African rand and selling the Mexican peso; and JPMorgan's strategist team said that with global economic growth weathering rising energy costs, holding long carry positions remained one of their highest-conviction FX strategies. Corporates Are Adapting Low volatility isn't bad news for everyone. It may also reflect a market that is liquid, efficient and able to keep absorbing shocks in a turbulent world. "The world may be unreliable, but the FX market is reliable," said Allan Guild, conference chairman and a director at Hilltop Walk Consulting. Corporates are adjusting their strategies. Georgios Velissariou, head of financial risk management in the treasury department at Hitachi Energy Group, said lower volatility makes options a more attractive way to hedge certain currency exposures. He was also one of the speakers at this year's conference. Meanwhile, for some banks, this environment is prompting a rethink of parts of their business. Karel Sanders, head of FX product management at Rand Merchant Bank, said dollar-rand volatility is at a 20-year low, forcing the South African bank to reconsider how it runs its options business. "Do we continue to be a market maker in FX volatility, or do we move to an agency business? We prefer the agency business," he said. Signs on the conference floor also suggest traders are looking beyond traditional FX for moves. At one booth, attendees were drawn by Dutch stroopwafels to vote in a contest guessing the day's biggest-moving currency pair silver against the dollar won. A Time Bomb? Several events that should have stirred the FX market during the same period failed to do so. On Sept. 16, the Federal Reserve raised rates by 25 basis points, lifting the federal funds target range to 3.75%-4.00%, the first hike since July 2023; that day the dollar index rose 0.70% to 100.33, EUR/USD fell 0.67% to 1.1464, the 10-year Treasury yield stood at 5.021% and the 30-year at 5.361%, while the front-month Brent crude contract held above $105. The next day, Treasury yields fell across the curve, with the 10-year down 9.1 basis points to 4.934%, the dollar index closing at 100.248, EUR/USD at 1.1475 and USD/JPY at 156.04. In other words, a rate hike, the 10-year Treasury oscillating around 5%, Brent crude repeatedly testing the $100 mark, and the ongoing Middle East conflict ultimately moved EUR/USD by less than 0.1% over two trading days. The problem is that the market is not short of catalysts that could ignite volatility. According to public data, the Fed's dot plot shows 16 officials expect further rate hikes in 2026. KKR expects the Fed to hike again in December and then next March, after which rates will remain unchanged until early 2029, while KPMG U.S. chief economist Diane Swonk believes this hike "won't be a one-and-done," and that the actual required magnitude may exceed official estimates. A market increasingly built on low volatility may be severely underprotected when the calm is rarely broken. Some see little reason to prepare in advance. "The market is in a situation where we don't know what the next catalyst will be, and no one is positioned for it, because if you're early, you're wrong," Carreau said. Prolonged calm does carry risks. Harel Jacobson, deputy portfolio manager at hedge fund Capstone Investment Advisors, said lower volatility forces traders to build larger positions to generate the same returns, leaving portfolios more exposed once rare outsized moves hit. "Eventually you have a ticking time bomb sitting in your portfolio," Jacobson said. His fund routinely buys cheap hedges specifically designed to guard against abnormally large market swings, and he pointed to last year's surge in the Taiwan dollar as exactly the kind of event they want to cover on May 2 and 5, 2025, the Taiwan dollar appreciated by a cumulative NT$1.872, or 6.21%, against the U.S. dollar, briefly touching NT$29.59 per dollar on May 5, a near three-year high. According to reports, major Taiwanese insurers have about $700 billion invested overseas, of which roughly $200 billion is not hedged for currency risk.