"Calm" Becomes the New Normal for Forex Markets: Selling Volatility and Engaging in Carry Trades, but Institutions Warn of Potential "Time Bombs"

According to The Smart Finance APP, at the TradeTech FX 2026 annual industry conference held in Amsterdam, the long-term lull in FX volatility became the main topic for the second year in a row. Investors described a market where bonds, crude oil, and geopolitics are experiencing dramatic changes, yet the foreign exchange rate remains stubbornly stable.

"What we're lamenting is the long-term downtrend in FX volatility," said Harish Neelakandan, co-CIO of systematic trend-following fund AlphaEngine Global Investment Solutions. "This is the hand we've been dealt. We just have to learn to live with it."

For a market with an average daily trading volume as high as $9.6 trillion, the absence of volatility has become an annual headache for traders—who rely on big moves for profits. However, this quieter environment is likely good news for asset management firms and corporates seeking to hedge their exposures.

According to the event’s official website, the conference was held at the Mövenpick Hotel in Amsterdam from September 15 to 17, with over 800 participants, including more than 300 buy-side and corporate representatives.

Central bank coordination suppresses volatility, shocks leave only pulses

Neelakandan noted that stronger coordination among central banks has helped rein in FX volatility, making geopolitical shocks only produce temporary volatility pulses. Unless this backdrop changes fundamentally, traders are likely to keep viewing these pulses as opportunities to short volatility once again.

"What we're seeing is 'nothing will happen' trading—people just keep selling volatility," said Thomas Carreau, FX portfolio manager at CN Investment Division, which manages the Canadian National Railway pension plan.

Carreau said that even the yen’s recent performance has been relatively restrained. Over the past few months, the yen has been the market focal point: it first fell to a forty-year low, then a joint intervention by the U.S. and Japan drove a series of sharp rallies. Still, its volatility remains at the lower end of its historical range.

In late July, the yen briefly fell below 160, approaching 1 USD to 164 JPY—a low not seen since 1986. On July 30, the Japanese Ministry of Finance, and on July 31, the U.S. Treasury sold dollars and bought yen in the market via the New York Fed. On August 3, Japanese Finance Minister Katsuyuki Katayama and U.S. Treasury Secretary Scott Besent jointly confirmed this was the first joint USD/JPY intervention since 1998.

Data from the Japanese MOF shows that from July 30 to August 26, the government spent 15.4 trillion yen (about $96.4 billion) on market intervention, setting a record for the largest amount in a single month. The initial effect was significant, with the yen quickly rebounding from near 164 and reaching as high as 155.20 on August 3. However, the upward effect did not last—the yen fell below 160 again on August 31, only recovering above 152 on September 8, when USD/JPY closed at 156 in New York trading. A nearly $100 billion joint intervention ended up putting the rate back near its starting point.

Additionally, advancements in electronic and algorithmic trading are also seen by some market participants as suppressing volatility. Some have warned that a lack of dramatic moves could drive market makers out due to unprofitability.

"Carry is King"

Carreau added that carry trades—borrowing low-yielding currencies to buy high-yielding assets—continue to perform well. He prefers to structure these trades as dollar-neutral because social media posts by President Trump can still trigger small intraday moves for the dollar. This is a strategy that performs well in a low-volatility environment.

"Carry is king," he said.

His view is consistent with the broader FX landscape this year. Recently, asset volatility of all types has been surprisingly low, fueling a rush into carry trades and making this the best backdrop for the most enduring FX bet in decades. Data shows that a “funding basket” strategy recommended by strategists at institutions like Citigroup—borrowing euros to buy a basket of BRL, COP, and TRY—was up about 18% year-to-date by mid-July, the best annual gain since 2005.

Low volatility is also benefiting carry traders more broadly: Early this year, JPMorgan’s volatility index showed that emerging market currencies’ volatility had stayed below that of G7 currencies for nearly 200 days—the longest stretch since 2008.

Sellers are also directly translating low volatility into strategy. In May, a Deutsche Bank FX strategy team led by George Saravelos suggested traders shift focus from the dollar to relative value among FX crosses; Wells Fargo analysts led by Alvaro Vivanco suggested buying ZAR and selling MXN; JPMorgan’s strategists said that as global growth withstands higher energy costs, being long carry trades remains one of their most confident FX strategies.

Corporates are adapting

Low volatility isn’t bad news for everyone. It may also reflect a market that is liquid, efficient, and able to keep absorbing shocks in a turbulent world. "The world may be unreliable, but the FX market is reliable," said conference chair Allan Guild, director at Hilltop Walk Consulting.

Corporates are adjusting their strategies. Georgios Velissariou, head of financial risk management in the treasury department at Hitachi Energy Group and a speaker at the conference, said that lower volatility has made options a more attractive way to hedge certain currency exposures.

Meanwhile, for some banks, this environment is prompting a rethink of parts of their business. Karel Sanders, head of FX products at Rand Merchant Bank, noted that USD/ZAR volatility is at a twenty-year low, forcing the South African bank to reconsider how to run its options business.

"Do we keep making markets in FX volatility, or do we switch to an agency model? We're leaning towards agency," he said.

Clues on the ground also showed traders seeking action outside traditional FX. At one booth, Dutch syrup waffles enticed participants to vote for the most volatile currency pair of the day—the result: silver against the dollar took the win.

A ticking time bomb?

Several events that should have shaken FX markets at the same time failed to do so. On September 16, the Fed hiked by 25bps, raising the fed funds target range to 3.75%-4.00%—the first hike since July 2023. On the day, the dollar index rose 0.70% to 100.33, EUR/USD dropped 0.67% to 1.1464, the 10-year US Treasury yield was 5.021%, and the 30-year yield was 5.361%. Front-month Brent crude held above $105/bbl.

The next day, US Treasury yields fell across the curve; the 10-year retreated 9.1bps to 4.934%, the dollar index ended at 100.248, EUR/USD at 1.1475, and USD/JPY at 156.04. In other words, one rate hike, 10-year Treasury swinging around 5%, Brent repeatedly testing $100, and ongoing Middle East tensions all added up to EUR/USD moving less than 0.1% in two days.

The issue is not a lack of potential volatility triggers. Publicly available data shows the Fed's dot plot has 16 officials expecting further hikes in 2026. KKR expects the Fed to hike again in December and then March, holding rates steady until early 2029. KPMG US chief economist Diane Swonk thinks this hike "won’t be the last," and the needed amount could exceed official estimates.

A market increasingly built on low volatility could be severely underprotected when the rare calm is finally broken. Some believe there’s no reason to prepare in advance.

"The market is in a place where no one knows what the next catalyst for an outbreak will be, and no one is positioning for it—because if you’re early, you’re wrong," Carreau said.

Prolonged calm does bring risk. Harel Jacobson, deputy portfolio manager at Capstone Investment Advisors, said that lower volatility forces traders to take larger positions to generate the same returns, so when rare, sharp moves do strike, the portfolio’s exposure is much larger.

"Ultimately your portfolio is sitting on a ticking time bomb," Jacobson said. His fund routinely buys cheap hedges explicitly for outsized market swings, noting that last year’s Taiwan dollar surge was a textbook case—the TWD appreciated 1.872 per USD (up 6.21%) over two trading days (May 2 and May 5, 2025), hitting 29.59 per USD intraday, a near three-year high. Media reports estimate Taiwan’s major insurance companies have about $700 billion invested abroad, with about $200 billion of it completely unhedged.