Evaluating FX vol relative to interest rate volatility

- "We evaluate FX volatility using interest rate volatility. The relationship with the vol of associated interest rate spreads is persistent and has been especially strong in the past few years. Current valuations point to G10 FX vol being rich vs interest rates and EM FX vol appearing cheap by the same metric. With developed-economy policymakers increasingly expected to leave interest rate policy unchanged for a substantial period and growth prospects in G10 expected to be on average sluggish, we recommend selling G10 FX vol. Against this, to make the trade more relative-value in nature, we recommend buying EM FX vol – specifically a basket of TRY, ZAR and BRL vs USD."

Nomura Macro Insights 20100812

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