Blowout fear for forex markets as coronavirus stirs dormant volatility trades

LONDON: With this week's coronavirus-driven rout having shaken awake previously slumbering euro-dollar markets, the spotlight is back on the"short volatility" trades that some regulators fear could trigger a blowup on world markets.

But there's some trepidation too as memories stir of the 'Volmageddon' crisis of February 2018 when the short equity volatility trade imploded, sending investors scrambling to recoup losses and triggering a huge Wall Street selloff.With regard to positioning linked to currency markets, any sharp rise in volatility would hit those who have shorted vol by selling options, as well as those who bought more risky assets, betting exchange rate swings would decline or stay stable.

The Bank of England and European Central Bank declined comment. The New York Federal Reserve did not return calls and emails seeking comment. Measures of currency activity have been falling since the 2008 financial crisis, as central bank liquidity taps have gushed, inflation fallen and policies moved more or less in lockstep.

"We don't know, in the context of a global recession and associated market selloff, how resilient the fund industry will be," Tobias Adrian, director of the IMF's monetary and capital markets department, told Reuters, warning of a"potentially destabilizing" situation. Such trades can yield handsome profits - for instance, shorting euro to buy equal weights of the dollar, rouble and Brazilian real would have made 11.5per cent in 2018/2019, Refinitiv data shows.

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