The options market is telling currency traders to be prepared
There are periods that the 1-month vol for AUD/JPY surpasses the 1-year vol but there's a hint that this time around it may be here to stay.
We're entering a period of continued escalation in the US-China trade rhetoric and that has the potential to set up a prolonged period of uncertainty in markets.
As such, expect the kind of volatility seen today to potentially stay the course over the coming weeks/months. A good barometer for risk assets is AUD/JPY and with 1-month vol touching its highest since January - also spiking well above the 1-year vol - I reckon risk trades will be more cautious as US and China continue their tit-for-tat volleys at each other.
What does that mean for currencies?
If anything else, all this sets out the expectation that risk sentiment is going to be a defining factor in driving markets in the short-to-medium-term.
That means haven currencies such as the yen and franc as well as risk currencies such as the aussie and kiwi will be the most affected by fluctuating risk sentiment depending on how the trade war between US and China develops.
