Has Currency Volatility Hit a Peak?

On Tuesday, we talked about how volatility in the forex market has exploded in 2008. Although trading ranges expanded significantly in October and November, volatility has contracted since the beginning of the month.

The following chart from Bloomberg illustrates how far 3 month volatility for the EUR/USD has fallen since hitting a record high in late October. Anyone that follows the currency market on a regular basis can attest to its recent range trading behavior. There are good reasons for the compression in volatility as the year is winding is coming to a close and new positioning becomes one of the last things on the minds of currency traders. It has been a tough year and many funds are closing their books early to lock in remaining profits.

If volatility does continue to fall, it would help carry trades recover. One of the big reasons why the Japanese Yen has outperformed this year is the explosion in volatility.

However it may still be premature to say that volatility in the currency market has peaked because December 16th will be a historic moment for the US Federal Reserve. Not only are they expected to take interest rates to the lowest level this generation has ever seen but they have to figure out how to effectively signal their intentions of taking US interest rates to zero without completely spooking the markets.

Thin trading going into the holidays can also exacerbate moves in the currency markets. I remember how the EUR/USD increased 300 pips between Christmas and New Years in 2007 and did the same in the first 3 trading days of the year.

EUR/USD Volatility

Photo: Bloomberg

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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