The Fed didn't start the volatility and it won't stop it, no matter what
Volatility has been edging lower in the past week as the market hunkers down ahead of the Fed. The decision will no doubt create emotion and some big moves. But even if the Fed colours within the lines and takes a dovish stance, nothing will change in the wild world of forex.
The Fed isn't the reason for volatility to begin with. The big stories in the last 14 months is the end of the commodity supercycle and disappointing emerging market growth. That has very little to do with the Fed.
China is another one. It's not just that China is slowing down. It's that China is so opaque that don't know if it's hit a bump in the road or a crater. That won't change today or any time soon.
The other factor is central bank divergence and this is where the Fed plays a role but it won't change today. Since 2008 you've basically had two types of major central banks: The dovish ones and the more dovish ones. Now we have the BOE and Fed talking about hikes while the BOJ and ECB are easing. That kind of divergence is a recipe for currency moves.
Why volatility will stick around
The hallmark of early-stage turning points is volatility.
The most obvious turning points at the moment are the 30-year rally in bonds and 15 year rally in commodities. But if the Fed slips up and cuts the legs out of the stock market, the 7-year rally there could end too.
