Subdued FX volatility in August is unusual: BofA analysts

In a note sent to clients, BofA Global Research said the FX market has been unusually calm in August—an uncommon occurrence, even during typically quiet “summer markets.” Analysts link this subdued volatility to stable rate differentials and a relatively steady U.S. dollar risk premium—factors BofA believes won’t last much longer, especially amid ongoing tariff uncertainty.

“We expect FX volatility to rise into September,” the analysts noted. While “implied volatility”—the market’s forecast of future swings, reflected in options pricing—has dipped recently, it remains elevated compared to historical norms. Most major currencies are still trading near their long-term volatility averages based on a 15-year comparison of implied versus realized volatility.

The one outlier is USD/CAD. The research shows that both three-month and one-year implied volatility for the U.S. dollar-Canadian dollar pair are at just the 5th percentile of realized volatility since 2010—suggesting that current market expectations may underestimate future moves. BofA anticipates increased volatility in this currency pairing, pointing to ongoing trade policy uncertainty and Canada’s gradual shift to more diversified trading partnerships. The long-term impact on FX rates will essentially depend on the effectiveness of tariffs, the amount of retaliation, and whether different economies prove to be resilient.

Stephen Philipson, vice chair and head of wealth, corporate, commercial, and institutional banking at U.S. Bank, recently told me that FX risk management is a pressing concern for CFOs right now. More companies are using collars—an options strategy that caps downside risk without limiting upside gains—to hedge their exposures. “And many firms are shifting to pay foreign vendors in local currencies to meet supplier demands and reduce costs,” Philipson said. He also explained that much of CFOs’ cautiousness is driven by three main issues: heightened anxiety around the tariffs, a weaker dollar, and rising working capital needs.

As volatility could return to the FX market, finance chiefs will need to stay agile and proactive.

Sheryl Estrada
sheryl.estrada@fortune.com

Leaderboard

Big Deal

U.S. stocks are poised to start the week on a positive note, following a dramatic turnaround on Friday after Federal Reserve Chairman Jerome Powell signaled that a rate cut is possible as soon as September.

“The shifting balance of risks may warrant adjusting our policy stance,” Powell said, referring to his concerns about slowing job growth. This is a more explicit signal than he has previously given that the Fed is considering a rate cut. The Dow closed at a new all-time high on Friday, while the S&P 500 and Nasdaq moved closer to their records.

A key report to watch this Friday is the Personal Income and Outlays report for July 2025 from the Bureau of Economic Analysis. It includes the Personal Consumption Expenditures (PCE) Price Index—the Fed’s preferred inflation gauge. This data is especially important now, as policymakers assess how tariffs are impacting inflation.

Going deeper

“Reconfiguring work: Change management in the age of gen AI” is a report by McKinsey that argues creating value requires empowering employees to co-create generative AI products against a North Star that redefines ways of working.

One of the key findings is a North Star should be simple enough for everyone to understand, however bold enough to inspire the entire company. That includes being flexible and evolving alongside technology. A piece of advice from McKinsey: the North Star should clarify how the company will create value and competitive advantage from generative AI, as well as outline its expected impact on the talent life cycle. 

“Simply putting new technology into people’s hands does not ensure they will use it effectively, nor does it profoundly change the way a company works,” according to the report. “Instead, CEOs need to deploy a novel change management approach that mobilizes their people, turning them from gen AI experimenters into gen AI accelerators.”

You can read the complete report here. 

Overheard

“This deal could signal to other states that this is how data centers should be governed and operated. This would be a test across the nation.”

—Louisiana Public Service Commissioner Davante Lewis told Fortune in an interview regarding tech giant Meta investing $10 billion to build a new AI-optimized data center in rural Richland Parish, Louisiana. This will be Meta’s largest data center in the world.