This represents a dramatic drop from the March surge that came after the Iran conflict began.
ING currency strategist Francesco Pesole called the drop "remarkable." His read: "AI-fueled equity resilience still appears to be anchoring currencies and helping sustain a self-reinforcing low-volatility, carry-trade environment."
The numbers back him up.
So what is keeping everyone so relaxed? Two things. First, the stock market keeps chugging along, especially the AI-fueled names that have propped up the whole rally.
Second, energy prices absorbed the initial shock from the Middle East escalation without much drama. As BNY strategist Geoffrey Yu wrote this week: "Middle East escalation is not dominating cross-asset pricing because energy markets absorbed the initial shock."
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Here is where it gets tricky. A market that calm can also be a market that is caught sleeping.
Yu put it bluntly, stating, "Growth is being verified, FX carry is working and earnings are supporting the cycle." Then he added this warning: geopolitical risks are being underpriced.
The trade that is benefiting most from this quiet is the carry trade. That is where investors borrow in a currency with low interest rates - right now the Japanese yen is the favorite - and use that money to buy higher-yielding currencies elsewhere. It works beautifully in calm markets. It falls apart fast when something unexpected hits.
Global portfolio managers are more bearish on the yen than they have been in about four years, according to a Bank of America survey.
When combined with extreme bearishness on the yen, this creates a crowded trade that could unwind violently if sentiment shifts.
The calm feels good right now. Low volatility makes your portfolio easier to manage and it keeps the doomsday scenarios off the table.
However, analysts from Citigroup Inc. - Bhumika Gupta, Alexander Rozhetskin, and Luis Costa - noted on Friday that July historically offers a favorable risk-return profile for carry trades. The analysts warned that August frequently becomes a turning point when macroeconomic volatility rises, making crowded carry trades susceptible to surprise events.
Pesole made a telling point about that. Even after the chip-stock selloff last Friday - a day when a lot of those AI darlings got crushed - he expects the carry trade to remain popular. That is confidence. It is also the kind of confidence that gets tested.
The bottom line: dollar hedging costs are telling you the market has priced in a very smooth rest of the summer. That could turn out to be right. But the quiet is built on the assumption that nothing breaks - no surprise from the Fed, no escalation in the Middle East, no August shock. Those are assumptions worth keeping an eye on, especially when the price of protection is this cheap.
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