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Trade War May Be Impacting Global Flow of Capital

There’s one market where an inverted curve is already causing pain for portfolio managers: foreign exchange.

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Ben Emons, chief economist and head of credit portfolio management at Intellectus Partners, highlighted the inversion in some currency volatility curves as another channel through which angst over potential shifts to the global trading order are weighing on equities around the world.

The one-month implied volatility of the U.S. dollar relative to the yuan now trades at a premium to that of the one-year contract, a shift that’s occurred amid the greenback’s 3 percent advance versus the Chinese currency over the past two weeks.

This doesn’t get nearly as much attention as yield curve inversions, but it’s still a clear negative for markets because it encourages portfolio managers to take less risk abroad, according to the strategist.

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