A measure of currency volatility dropped to the lowest level since August 2008 amid signs the global economy is improving, giving investors more confidence to buy assets that appreciate in periods of growth.
Implied volatility of three-month options on Group of Seven currencies as tracked by the JPMorgan G7 Volatility Index fell as low as 9.79 percent today, the least since Aug. 8, 2008, before trading at 9.92 percent at 11:14 a.m. London time. A lower figure makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.
“The improvement that we’ve seen in terms of global data flow means that a somewhat lower risk premium is justified,” said Todd Elmer, head of Group-of-10 foreign-exchange strategy for Asia excluding Japan at Citigroup Inc. in Singapore. “We feel that somewhat more benign trading conditions are likely to prevail over the course of 2012.”
Higher-yielding currencies have surged in 2012 as improving data in the U.S. has sapped demand for the perceived havens of the dollar and the yen.
The Mexican peso has appreciated 9.2 percent versus the greenback in 2012, the Brazilian real strengthened 8.2 percent and New Zealand’s dollar gained 6.7 percent. Mexico’s benchmark lending rate is 4.5 percent, Brazil’s is 10.5 percent and New Zealand’s is 2.5 percent compared with a low as zero in the U.S. and Japan.