As volatility measures fell at the start of the week amid relief over the French election, “carry” traders will have been playing special attention.
At its simplest, the carry strategy sees speculators borrow at low rates to buy assets with a better return. It can be relatively straightforward in forex where divergent monetary policies can be exploited.
But it is deemed too risky — read expensive, because it needs to be hedged — if market volatility is high.
So carry traders of all asset stripes will have been pleased on Monday to see one-month volatilities for the US stock market plunge 26 per cent, euro/dollar fall 35.6 per cent and gold drop 19.7 per cent.
This may have particular implications for the yen, for which volatility receded 19 per cent.
The Japanese currency tends to strengthen at times of market stress but then can weaken as it becomes a favourite source of carry trade funding, given its low yield. Japan’s main interest rate is minus 10 basis points.
But where to invest your yen funding? Lee Hardman, currency analyst at MUFG, suggests the Turkish lira, which strengthened on Monday, having been helped of late by the calm reaction to the country’s recent constitutional referendum.
“The higher yields on offer in Turkey [one-week repo is 8 per cent] driven by the aggressive monetary tightening undertaken by the Central Bank of Turkey early this year should continue to encourage a stronger lira,” said Mr Hardman. The central bank delivers a policy update on Wednesday.