Bilal Hafeez, head of G10 FX strategy at Nomura, warns that the current level of inactivity in the market should not be confused for investor euphoria.
"It seems uncertainty surrounding the Trump administration's policies and French elections have resulted in cautious investor positioning and even inactivity," Hafeez writes in his latest research note, adding that the recent decline in commodity prices, seemingly driven by a slowing China, has also been remarkably contained.
Hafeez further explained that even though risk measures are at low levels, this does imply investor euphoria.
"Instead, external triggers will be needed to trigger a bout of risk aversion. An obvious one would be policy action such as an overly hawkish Fed or a growth-insensitive PBoC (People's Bank of China). With the former, the market is already almost fully pricing a hike in June, and so the Fed would need to talk up later hikes, which we think is unlikely in the run-up to the June meeting.
With the latter, we think the Chinese authorities would be reluctant to induce a sharp slowdown ahead of the 5 yearly National Congress to be held later this year."
The volatility index was seen to hit single digit lows after centrist Emmanuel Macron won the French Presidential election over the weekend. Global stocks got a boost but safe-haven currencies such as the yen and the Swiss franc suffered but analysts warned against taking huge risks in this quiet market.