FX Daily: Low volatility prevails
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.
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.
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.
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.
Risks to this view
A significant sell-off in the bond market, driven by over-issuance or unexpected economic events, could disrupt the favorable carry trades and shift investor sentiment swiftly, leading to increased volatility across FX pairs.
AUD/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 0.7200 |
ING | Bullish | 0.7300 |
Rabobank | Bullish | 0.7200 |
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 rate in September. Expect FX carry trades to remain in demand for the time being, but eyes to stay keenly on the bond market. Here, the issue is whether investors can absorb a lot of new supply from the tech sector Chris Turner , Frantisek Taborsky and Francesco Pesole The RBA left rates unchanged at 4.35% today, with Governor Michele Bullock delivering a hawkish message USD: Realised volatility sinks Perhaps unsurprisingly, realised FX volatility is sinking in mid-August.
The main risk event on the horizon is the Fed's policy meeting on 16 September, where the market prices exactly a 50% chance of a 25bp hike. Whether the Fed hikes or not will be determined by a few data points ahead of that meeting. However, it looks like investors are not going to be unnerved by that meeting and will, instead, be comfortable picking up carry from high-yielding FX.
In G10, the Norwegian krone has delivered the strongest total returns this quarter, while in emerging markets, three Latin American currencies rank among the top four performers. Should tomorrow's US July CPI release nudge market pricing towards or against a September Fed hike, we doubt it would have much impact on the carry trade. The one wrinkle on the horizon is the bond market.
Longer-dated US Treasury yields are at the top of recent ranges and the tech industry is planning a lot more issuance. Nvidia announced yesterday it would partner with six investment houses to arrange $500bn of debt financing for its customers. Buy now, pay later.
A sell-off in the bond market probably remains one of the key threats to a benign environment over the coming months. For today, the US data focus is on July existing home sales and the weekly ADP release. For the latter, the four-week moving average has dropped to +18k from a peak near +38k in April.
Any downside surprise here could briefly hit the dollar following Friday's soft July payrolls release . DXY looks set to continue trading in a 99.50-100.00 range into tomorrow's CPI release. Chris Turner EUR: Gone fishing EUR/USD realised volatility continues to sink and one-year is now at 5.8% – matching the low from November 2024.
As above, it is hard to see that environment changing anytime soon – or at least until mid-September when central bankers around the world return from their summer breaks. We published an article yesterday looking at the dollar hedge ratios of European investors. The risk here is that European investors in the US are once again underhedged and have to quickly raise their dollar hedge ratios should the dollar look vulnerable again.
Sources & References
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