FX volatility surges to a 15-month high amid market chaos – London Business News | Londonlovesbusiness.com

Amid the chaos in the equity and rates markets following Friday’s weak non-farms release, Deutsche Bank’s FX volatility gauge has spiked to its highest level since May 2023.

The 114K payrolls print landed far lower than the 176K forecasts, and markets have been hugely spooked about the potential for a non-linear deterioration in the labour market and a severe economic slowdown.

Market pricing is now essentially arguing that the Fed is well behind the curve and has missed its opportunity to cut proactively.

An emergency intermeeting rate cut within one week is being priced at 60% (!!) and up to five cuts are expected by the end of the year.

Whether this move will stick today will largely depend on what the Fed has to say and what the employment subindex looks like in the ISM services PMI. Markets have descended into apocalyptic panic on the back of a single data point that is often heavily revised.

Big bets on an intermeeting rate cut are a clear signal that traders are overly spooked, and I expect this extreme positioning to be unwound rather quickly. It is certainly time for the Fed to cut next month, but the US economy is not falling apart just yet.

The low-yielding safe havens (i.e. CHF and JPY) are the familiar winners from this sort of move, and it’s NOK, AUD, and NZD taking the most punishment this morning. Trading in GBP/USD is verging on erratic this morning, with three 0.7% swings in the absence of any catalysts.”