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G10 and EM: Volatility sharply up following Brexit – Deutsche Bank Sandeep Kanihama

Research Team at Deutsche Bank, suggests that the trendiness in the G10 universe has remained at decent levels, largely driven by EUR/GBP and USD/JPY following the EU referendum in the UK.Key Quotes“Cross correlation among G10 currency pairs also increased modestly over the last two weeks, as the ‘Brexit’ theme dominated. Volatility increased sharply in the aftermath of the Leave outcome. Realized volatility for G10 currencies is now at the highest level since September 2015.Over the past quarter, sovereign risk and monetary policy have dominated G10 price action. Tightening sovereign credit spreads have helped CAD, JPY and NZD outperform but were also correlated strongly with more stable monetary policy expectations than elsewhere. Among the macro indicators, valuation has been consistent with cheap currencies such as JPY outperforming. By contrast, current account surpluses in the continental European economies did not help their currencies. Once more, only JPY traded in expectation with its large current account surplus.EMContrary to G10, trendiness in the EM space has remained at very low levels over the past fortnight. Uniformity continues to remain at elevated levels, which is now at all time highs. Meanwhile, volatility in the EM space has also increased significantly over the last two weeks. These are not ideal conditions for trading.Sovereign risk and carry continue to strongly influence EM FX price action. BRL, RUB and ZAR continue to remain outliers in the EM space as the risk appetite for high yielders has increased during the last three months. In terms of macro drivers, valuation has provided further support to high yielders. On the other hand, easing inflation has been consistent with currency strengthening.”



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