Institutional Insights: Morgan Stanley FX Pulse

USD Stable Amid a Downtrend - The return of vol. The recent price action reminds us that economic activity is not necessarily immune to asset volatility, as seen in the aftermath of the 1987 stock market crash, for example. Global reflation, combined with USD weakness, created ideal liquidity conditions for pushing volatility to record lows, aided by short-vol yield-enhancement strategies. Risk parity funds compounded this problem by simultaneously adding to bond and stock positions. Thus, a vol spike was unleashed as US rates rose, leading to a decline in the equity risk premium, as investors reassessed the capital market outlook...
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