FX volatility could be on the rise as central banks focus on inflation – Month in Review: October 2021
Macroeconomic Environment Review
Currency performances diverged in October. The US Dollar was broadly stable, but the Japanese Yen fell while most other major currencies rallied. The different currency moves reflect the market’s repricing of changing monetary policy positions. The divergence may also lead to more FX volatility as central banks focus more on inflation and less on financial stability. The outcome of the last Fed meeting was as expected as far as the start of tapering is concerned but the statement was vague about the direction of policy going forward. The Fed wants to see more improvement in labor market conditions and hopes that inflation will ease next year.
This month we will again quote the views of Bernhard Eschweiler Ph.D., which largely reflect our own outlook on the markets: “Low growth, inflation and interest rates helped keep FX volatility in check over the last decade. With inflation not a serious concern, central banks could focus on maintaining financial stability to safeguard growth and FX market participants had little appetite to bet against central banks. This is changing now as inflation is on the rise. We think frictions caused by the pandemic will fade next year and reduce inflation rates. Still, a return to the low inflation environment of the previous decade seems unlikely. Thus, central banks will have to pay more attention to inflation. The result is likely to be more divergence in central bank policy depending on the cycle state of each economy and inflation pressures.” For market participants, this creates more opportunities to position on policy outcomes and increases the appetite for more short-term moves in the FX markets.
Monthly Performance Review
During the month of October 2021, AENAON Syncro Strategies generated the following total returns net of fees:
Across the spectrum of our benchmark indices, our strategies’ performance during October was rather positive. As a comparison, the US S&P 500 equities index gained 6.91%, the Barclay Hedge Fund Index posted a 1.64% uptick, the Barclay CTA Index gained 1.06% while the other benchmark indices can be seen on the chart below.
Chart 1: Monthly Performance vs. Benchmark Indices – October 2021
Charts 2, 3 and 4: Inception to Date Performance vs. Benchmark Indices
You can always review AENAON Syncro Currencies’ updated factsheet at our Fundpeak link, with monthly performance updates and statistics since inception.