Morgan Stanley analysts say low volatility in G10 foreign-exchange markets is
likely to continue through late August and into early September. Data from now
through the September Fed meeting should be consistent with expectations that
the Fed will hold rates for the rest of the year, prompting markets to gradually
price out further tightening. Given a weak long-term link between Fed policy
pricing and FX volatility, the bank expects FX vol to come under downward
pressure. With Middle East risks largely priced in ahead of the US midterms and
August historically a quieter month, market calm may persist.
