Alan Ruskin, Macro strategist at Deutsche Bank, suggests that while short-end FX vol has spiked yesterday, this is not the kind of vol that breeds more volatility. Key Quotes “After scorched earth trading, FX vol should retreat. The pattern of past Februarys has been a reduction in 1m realized CVIX vol in 17 of the last 20 years relative to January. This compares with January realized vol that has picked up relative to December in 15 of the last 20 years. Central Banks, like the ECB and BOJ face diminished (FX) returns to unorthodox policies. Fed expectations eventually did matter, but the impact was all concentrated in one day! The most important part of the shift in Fed expectations has already taken place, leaving much less USD downside. The ‘USD Smile’ should survive. All risk-off days are not equal. A ‘risk-off’ day driven by the US can be USD negative, but the majority of ‘risk off’ days are likely to have a non-US source, and are more likely to be regarded as USD positive. One constancy is China concerns. When China drives risk, the USD should remain the favored currency. Expect a smaller commodity currency response to changes in commodities and equities. Appropriate conservative reentry points on short commodity FX trades are 1.35 for long USD/CAD, and 0.7360 for short AUD/USD.” For more information, read our latest forex news.