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FX market volatility seen intensifying before year end

While recent attention has focused on Europe and the US, developments across Latin America and Asia Pacific will also make a sizeable contribution to heightened market volatility during the remainder of 2022.

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Given FX market movements across the world, it was little surprise that the latest survey from the Bank of England’s foreign exchange joint standing committee, published at the end of July, reported increased turnover across swaps, outright and non-deliverable forwards. All three reached record highs, the survey found.

The rising cost of funding in dollars and more recently in euros has ramifications for the rest of the world and explains the record demand for instruments that provide hedging in FX and rates markets.

As long as stagflation fears persist, we would expect FX volatility to remain high
George Saravelos, Deutsche Bank

Bank of America expects this trend to extend to the end of the year amid the perfect storm of a global economic slowdown, hawkish monetary policy, an equity sell-off, geopolitical uncertainty, inflation and an energy crisis in Europe.

There is precious little certainty to be had anywhere else this year, with elections in Latin America clouding the policy picture in that region, according to Oliver Brennan, FX volatility strategist at BNP Paribas Markets 360.

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