The volatility analysis being produced by the quant desk at CMC Markets provides a series of useful indicators, allowing market participants to be alerted to spikes in volatility across the company’s universe of tradable instruments. This can be helpful in building a picture of where the price action is being seen at any one point in time, and has critically also identified when market sentiment starts to cool – even when the underlying events which initiated the elevated levels of price action are ongoing.
In the first half of 2022, a number of clear examples of this were seen in terms of central bank monetary policy interventions. Historically such moves occurred on a regular basis, but the extended period of ultra-lax monetary policy and quantitative easing which has dominated since the 2008 Financial Crisis meant that the market reaction and the subsequent duration of those bouts of elevated price action provided some valuable, albeit time limited, trading opportunities.
Before looking more closely at these examples, any typical analysis of currency market volatility will predictably be dominated by fringe pairs, including the likes of USD/TRY or USD/HUF. By their very nature, these currencies see lower levels of underlying liquidity, so will react more dramatically to any news updates. The Hungarian Central Bank’s decision to hike interest rates by 2% to 9.75% in July 2022 left daily volatility on US Dollar – Forint surging to almost 32%. Similarly, the repeated aggression [PK1] [VP2] on the Turkish Lira as the country attempted to deploy some less orthodox thinking when it came to monetary policy, cutting interest rates despite inflation running around 70%, have repeatedly seen daily vol printing in the high 20’s. For context, typical levels of volatility on major currency pairs such as EUR/USD or USD/CHF – something that could perhaps be best described as frictional volatility – would usually run around the 10% mark.
On June 16th, 2022, the Swiss National Bank shocked markets by electing to hike rates by 50 basis points instead of the widely expected 25 basis point increase. This drove such a level of price action in the Swiss Franc that USD/CHF vol on the day reached 25.21%. To give this some context, USD/ZAR only traded up to 23.81% on the day. The following 24 hours saw the interest here prolonged, with daily vol on June 17th reaching 24.84%, although the pattern had normalised by the following week.
In addition to this providing an indicator of potential short term trading opportunities, understanding how long such bouts of erratic price action last for can also play a useful role when it comes to risk management. Those looking to trade long term trends can close or adjust positions before any scheduled and potentially adverse news event, then reopen once the volatility has ebbed away. Many would contend that on a well-established trade such as Dollar-Swiss, the elevated levels of volatility should last for minutes, not days.
On a rather more subtle basis, the Euro saw a similar reaction to the European Central Bank’s announcement on June 9th, 2022, that it intended to raise interest rates by 25 basis points at the next monetary policy meeting. With many fringe Eurozone states still struggling post-pandemic, there was concern that this could result in a new round of sovereign debt challenges – a so called fragmentation. The jump in price action here was short lived, but still notable, with EUR/USD printing 11.07% on the day against a one month average of 9.14%. Even more enthusiasm for the trade also emerged ahead of the June US non-farm payroll reading as the pair eyed a test on parity. In this instance, daily vol reached 13.12% against what had advanced to a monthly average of 10.57%.
Insights as to where risks lie and just how long such risks are sustained for are valuable to both short and long term strategies alike. The data provides another useful tool for all investors looking to manage and take risk appropriately.
