As already flagged, volatility
in the Foreign Exchange markets is at a low ebb at present. Traders do not
like wild moves that signal very high volatility, but they need some of it in
order for profits to be made on currency exchange rate moves. Right now they
would ideally like a little more.
The chart for USDJPY, which
is one of the world’s major currency pairs, shown above, illustrates the
sideways affect on price of such a low level of trading activity in the market.
The fact that price has now coincided with the 200 Day Simple Moving Average
might, just might, be enough to trigger some kind of reaction, but it would be
foolhardy to bet on it in either direction.
According to the textbook
understanding of volatility in Forex, it has three characteristics: It is
cyclical, and we are undergoing a low segment in that cycle at present; it is
pervasive, in the sense that it tends to be self fulfilling. Traders who see
little reason to enter the market today will, most likely, feel the same way
tomorrow; and it reverts to the mean. What this last means is that low (or high)
volatility does not last.
However, a change from low to high requires a
catalyst. The most obvious candidate for this, based on history, is a
resumption of interest rate rises in the developed economies. Apart from some
early hints of such as thing happening in the UK ,
there is very little in prospect in this area anywhere else, apart from
relatively tiny New Zealand .
Another trigger could be a severe correction in equities. This looks somewhat
more likely, for a number of reasons. Or there could be a major escalation in
geopolitical crises. Watch out for Ukraine .
Or we could, of course, have a black swan event.
The Euro against the British
pound (EURGBP) has been in a down trending channel since the middle of last
year (2013). Fundamentally, as can be seen in its rise against the US dollar,
the pound is robust at present. So is the Euro, but its strength is not as
compelling, due to the deflation fear and the possibility that the ECB will, at
some stage, do something to counter this.
EURGBP is now approaching a
level of support. If this were to be breached, and the down channel reinforced,
there is no reason why the pair could not continue to the downside for some
time to come.
Later today we will have interest rate decisions
in both the UK
and the Euro zone. We also have monetary policy statements and, in the ECB, a
following press conference. Decision in both jurisdictions, and the words of
Mario Draghi at the press conference, could have a profound effect on this
pair.
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