Where to look for volatility in the currency market?

21.05.2019 04:37|Conotoxia Ltd Analyst Team

At a time when the vast majority of central banks in developed economies (outside Norway) are in favor of stabilizing interest rates or even lowering them in the face of global economic slowdown and lack of inflation, volatility in the currency market seems to be lower.

We observe high volatility mostly when there is divergence in monetary policy and when one of the central banks announces interest rate hikes and the other, for example, their stabilization or, preferably, cut. Then, due to the divergence in macroeconomic data and monetary policy, it is easier for investors to bet on a currency that is supposed to be stronger in their opinion. At present, the situation is globally similar in each of the large economies, where no significant divergences are expected, and no crises occur. Even the increase in volatility in the stock market did not lead to an increase in fluctuations in the currency market. It seems that only a more serious shock could change such a situation. So where should you look for volatility?

Looking at the indices of expected volatility provided by the CBOE exchange, we will look at the popular currencies: the euro, the British pound and the Japanese yen.

Indeksy oczekiwanej zmienności dla EUR, GBP i JPY

Chart: EUR, GBP, JPY volatility indices. Source: tradingview

These are measures indicating potential 30-day volatility for individual currencies. In addition to the fact that in historical terms they remain at a relatively low level, it is worth noting that the British pound is running again. For a moment, with a stronger increase in risk aversion, the yen had more volatility, but now the return of the brexit case and the removal of Prime Minister Theresa May from power may increase volatility.

Meanwhile, the mild tone of the European Central Bank and the postponement of interest rate increases in time along with a pause in increases from the Federal Reserve means that volatility for the main EUR/USD pair still seems low.

To sum up, on the currency market the volatility measures in relation to historical averages remain at a low level, but if in any of the currencies there would be more fluctuations, based on the volatility indices, one could again point to the British pound.

 

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

59% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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See also:

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71.98% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71.98% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trading on CFDs is provided by Conotoxia Ltd. (CySEC no.336/17), which has the right to use the Conotoxia trademark.