Investment Rating - The report does not explicitly provide an investment rating for the industry but discusses the relationship between macroeconomic conditions and implied volatility in FX markets, suggesting that current levels of implied volatility are justified given the macro backdrop [4][46]. Core Insights - The report highlights that FX volatility has declined due to improved macroeconomic conditions, including a recent trade deal between the US and China, which has alleviated some recession and inflation risks [4][46]. - There is a strong positive relationship between FX implied volatility and macroeconomic uncertainty, indicating that when uncertainty increases, implied volatility tends to rise [28][32]. - The report emphasizes that US macroeconomic uncertainty has a more significant impact on FX volatility compared to other regions, particularly through factors like CPI uncertainty [28][31]. Summary by Sections Macro Drivers of Implied Volatility - Recent declines in FX implied volatility are linked to a less uncertain macroeconomic environment, with reduced tail risks related to recession and inflation [4][46]. - The report quantifies the impact of macro uncertainty on FX implied volatility using economic forecasts from Consensus Economics [21][27]. Relationship Between Realized and Implied Volatility - Implied volatility is closely related to realized volatility, often leading to mispricing in the early stages of economic shifts [9][12]. - Realized volatility has exceeded implied volatility for most of the year, indicating that markets have underpriced the actual volatility in FX markets [12][46]. Literature on Macro Drivers of Volatility - Previous studies confirm that macroeconomic conditions, particularly monetary policy, are key drivers of FX volatility [16][19]. - The report discusses how inflation and interest rate differentials have historically influenced volatility trends in FX markets [16][19]. Estimating the Impact of Macro Uncertainty - The report employs regression analysis to demonstrate the strong relationship between macroeconomic uncertainty and FX implied volatility across major currency pairs [27][28]. - US CPI uncertainty is identified as the strongest explanatory factor for FX volatility, followed closely by domestic monetary policy uncertainty [31][32]. What Matters at Different Points in Time - The report notes that while inflation has been a key driver of volatility, this relationship can shift over time based on economic conditions [34][35]. - Recent benign inflation data from the US has contributed to lower FX volatility, but potential increases in tariff rates could heighten macro uncertainty and volatility [34][46].