FX markets were unusually calm in August due to stable rate differentials and a relatively steady U.S. dollar risk premium, but that calm is expected to be temporary as FX volatility is forecast to rise into September. Implied volatility has dipped recently yet remains elevated versus historical norms, with most major currencies trading near long-term volatility averages. USD/CAD stands out with three-month and one-year implied volatility at the 5th percentile of realized volatility since 2010, implying potential underestimation of future moves. Tariff and trade-policy uncertainty and Canada’s trade diversification could amplify FX swings. Corporates are using collars and paying vendors in local currencies to manage FX risk.
BofA Global Research said the FX market has been unusually calm in August-an uncommon occurrence, even during typically quiet "summer markets." Analysts link this subdued volatility to stable rate differentials and a relatively steady U.S. dollar risk premium-factors BofA believes won't last much longer, especially amid ongoing tariff uncertainty. "We expect FX volatility to rise into September," the analysts noted. While "implied volatility"-the market's forecast of future swings, reflected in options pricing-has dipped recently, it remains elevated compared to historical norms.
The one outlier is USD/CAD. The research shows that both three-month and one-year implied volatility for the U.S. dollar-Canadian dollar pair are at just the 5th percentile of realized volatility since 2010-suggesting that current market expectations may underestimate future moves. BofA anticipates increased volatility in this currency pairing, pointing to ongoing trade policy uncertainty and Canada's gradual shift to more diversified trading partnerships.
Stephen Philipson, vice chair and head of wealth, corporate, commercial, and institutional banking at U.S. Bank, recently told me that FX risk management is a pressing concern for CFOs right now. More companies are using collars-an options strategy that caps downside risk without limiting upside gains-to hedge their exposures. "And many firms are shifting to pay foreign vendors in local currencies to meet supplier demands and reduce costs,
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