In an email exchange recently a friend of my working in the markets bemoaned the dull state of the forex market these days. I recall well how much grumbling there was in the middle 2000s about how little action there was in exchange rates at that time. I asked my friend if this was anything like that. His response was that the markets are the worst he’s ever known. No doubt there’s a fair bit of hyperbole in that statement, but this is a fellow who was a bank dealer in London back in the 1980s, so he’s seen a thing or two.

Overstated or not, the market has definitely gotten less volatile recently. As the weekly chart below shows, the USD Index has been in a quite narrow range for the last few months. That’s seen the Bollinger Bands get to their narrowest since 2006.

Weekly USD Index chart - click to enlarge

The range-bound dollar is linked to range-bound interest rates. As the 10-year Treasury Note yield chart below shows, the volatility there has dried up considerably of late as well. Exchange rates are closely tied to interest rates, and especially interest rate differentials. When those rates aren’t moving, it tends to keep the forex market quiet.

Weekly 10 year treasury chart - click to enlarge

Interestingly, though, the USD Index chart belies what’s been happening in the dollar exchange rates to a certain degree. If we look to the likes of EUR/USD and GBP/USD we can see weakening trends at work. These are being countered by an opposing trend in USD/CAD and USD/JPY (though in the latter case ranging is more the theme). That makes this a market where you want to be looking at specific pairs, not the major USD pattern as depicted by the index.

That said, however, the narrowness of the Bollinger Bands and interest rates suggests something big is building. One need only look at what has happened in the markets after the Bands got as narrow as they have become recently to see the potential for market mayhem this set-up represents. I’m definitely not calling for another Financial Crisis type experience for the markets. I think, however, that it won’t be too much longer before my friend is no longer complaining about dull markets.