Currency Volatility on Trump’s Tweets Fades as Traders ‘Bored’

  • Euro-dollar volatility dips, mirrors start of Obama, Bush eras
  • Markets seen responding less over time to Trump tweets

Volatility Low, Uncertainty High: What Gives?

Falling volatility in currency markets suggests traders are getting used to the rhetoric in U.S. President Donald Trump’s tweets.

Euro-dollar volatility, a measure of expected swings, has fallen to levels seen before the election in November, after spiking to a five-month high on Trump’s victory. Currencies have moved sharply on his comments, though this fits a trend of presidents having the greatest market impact at the start of their terms when they talk a lot, according to Kit Juckes, a strategist at Societe Generale SA in London and a veteran of more than three decades of research.

“The market is reacting to Trump comments and if he hasn’t tweeted by midday, people wonder if he’s slept in,” Andy Soper, head of G-10 options trading at Nomura Holdings Inc., said in an interview. “He is creating more volatility for sure but everyone is getting a bit bored. The market will start to pay less attention to his tweets and to get used to these tape bombs.”

The decline in euro-dollar implied volatility mirrors the moves seen after George W. Bush’s win in 2000 and Barack Obama’s victory in 2008.

The euro climbed the most in two weeks against the dollar on Jan. 31 after Trump’s trade adviser said the euro is “grossly undervalued”, showing the high sensitivity of the currency market to statements from the new U.S. administration. Trump has broken convention by making numerous comments on Twitter, including in the middle of the night, forcing traders to reassess how they are positioned in the 24-hour currency markets.

Reversing Course

On Feb. 1 the ruble erased its gains after Trump said he hadn’t eased “anything” on Russia, damping hopes for reduced sanctions that have driven a rally in the Russian currency since the election. Before his inauguration, the Mexican peso erased a 1.5 percent advance on Jan. 5 after Trump threatened Toyota Motor Corp. with a border tax for planning to build a factory in Mexico. The peso has since strengthened to its level just after the election.

“Looking across currency volatilities, from euro-dollar to dollar-peso, fear ebbed as the market gets used to the style of the new president,” said Sebastien Galy, director of foreign-exchange strategy at Deutsche Bank AG in New York. “The market is still trading on Trump’s tweets, but the reaction function on dollar-peso has clearly weakened.”

After just two weeks of his administration, we have reached ‘peak-tweet’, said the head of G-10 currency trading at a bank in London, who asked not to be named as he is not authorized to speak to media.

“I would expect the daily comments from the Trump administration in support of trade protection and accusing other countries for currency manipulation to have a diminishing market impact,” Athanasios Vamvakidis, head of G-10 currency strategy at Bank of America Merrill Lynch, said in an interview in London. “It may not take long,” he said, adding what will eventually matter for the greenback is U.S. economic data, fiscal and monetary policy.

Before it's here, it's on the Bloomberg Terminal.