Global foreign exchange implied volatility has declined to a historically low level, led by advanced economies currencies (notably the EUR and the JPY).

Central banks’ liquidity swaps – especially between the Federal Reserve and the ECB  - have fostered such a decline by providing USD liquidity in times of stress. In the wake of the Great Financial Crisis, such a decline has, however, been also supported by a substantial decrease in the USD funding needs of Euro Area commercial banks as they have downsized their cross-border operations. And, important point to bear in mind, the decline in global FX implied volatility is, not to a small extent, part of a broad decline in the implied volatilities of equities and interest rates.

At first glance, the CNY does not seem to have directly contributed to the decline in global FX volatility. We provide, however, evidence of the emergence of a CNY bloc, that has dampened global FX realized volatility. Such an emergence reflects the increasing integration of China in the global economy, through foreign trade and cross-borders capital flows.

The presence of a CNY-factor in non-CNY denominated assets creates “hidden” opportunities as well as “hidden” risks.