FX Daily: Low volatility prevails
At a Glance
The FX market remains in a low-volatility environment as traders soundly anticipate steady Federal Reserve policies in the near term, per the full note from ing-think. High-yielding currencies are likely to attract interest amid this setting, with the upcoming Fed meeting potentially shaping market sentiment. Currently, there's a 50% likelihood priced in for a 25bp rate hike in September; however, many investors seem unfazed by this uncertainty. In our coverage, the Australian dollar (AUD) sits significantly below some of the more optimistic consensus targets for 2026, implying potential for price adjustments depending on economic data releases and market dynamics.
Key Takeaways
- 01Low volatility in FX markets expected to persist as carry trades maintain demand.
- 02Market pricing indicates a 50% chance of a September Fed hike with limited immediate impact on carry trades.
- 03Key support for AUD/USD to assess remains below current spot, with notable targets across various firms indicating potential adjustments.
- 04Increased tech sector bond issuances may create headwinds if not absorbed smoothly.
Full Analysis
What the desk is arguing
The desk believes that low volatility will remain dominant in FX markets as market participants are seemingly unfazed by upcoming economic data and the Fed's policy direction. Per the full note from ing-think, investors are prepared for high-yield carry trades, despite mixed expectations surrounding the Fed's September meeting.
Current market pricing indicates a 50% chance of a 25bp hike, leading to expectations of carry trades sustaining their attractiveness. The growing issuance from the tech sector could create turbulence in bond markets, but for now, FX traders appear willing to embrace these carry opportunities amid low volatility.
Where it sits in our coverage
The current spot for AUD/USD is 0.6400, with December 2026 targets across firms ranging from 0.6800 to 0.7300. Key players among our per-firm coverage include: - Morgan Stanley: Dec26 target at 0.7100 - Rabobank: Dec26 target at 0.7200 - Scotiabank: Dec26 target at 0.7500
Our desk's view on the Australian dollar remains slightly more cautious than the consensus, especially as many targets hover at higher levels than current spot prices, indicating a recognition of room for upward adjustment.
How other firms see it
Several firms, notably Morgan Stanley and Rabobank, are aligned in their bullish perspectives on AUD/USD for the December 2026 time frame. Meanwhile, JPMorgan is presenting a more conservative view with a lower target of 0.6800. The divergence signals mixed sentiment about the Australian dollar's trajectory as the RBA maintains its hawkish stance.
Movements in the EUR/USD, given its considerable implications from ECB policies, also warrant attention in this context. With the ECB's direction, the cross-performance of AUD versus EUR is particularly illustrative for traders.
Market Implications
Focus on AUD/USD as it trades at 0.6400; expectations are set for volatility increases should the Fed announcement align more closely with bond market adjustments. Moreover, watch for the July CPI release for any indications that rush adjustments to rate hike probabilities.
AUD/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 0.7120 |
Bank of America | Bullish | 0.7000 |
Rabobank | Bullish | 0.7200 |
From the original
Articles FX Daily: Low volatility prevails Published 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Volatility in FX markets continues to sink as investors seem quite comfortable with the prospect of the Fed holding or tightening the policy
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