Forex Currency Volatility


Forex Currency VolatilityForex Currency Volatility is very important when trading either breakout or ranging currency strategies.

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Forex Currency Volatility Seen Weighing on Liquidity

(Bloomberg) — Foreign-exchange traders better get used to wider swings in exchange rates and less liquidity as the Federal Reserve keeps markets guessing while moving closer to raising interest rates.

Volatility for the dollar jumped to the highest level in 14 years Wednesday after the U.S. central bank indicated the pace of rate increases will be slower than it previously predicted while not ruling out tightening as soon as June. Credit Suisse Group AG said in a note Thursday that “traders described liquidity as being appallingly thin.”
“Things got a little nuts,” Timothy Rudderow, who manages $1.7 billion as president and chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania, said by phone Thursday. “Days like yesterday will make the market less liquid. People will be more reticent to commit to size, dealers will widen spreads, they’ll worry a little bit more about getting a shock like that.”
The difference between the price at which traders are willing to buy and sell major currencies has widened to the most since the 2008 financial crisis, according to data last month from JPMorgan Chase & Co.
The dollar plunged as much as 4.2 percent Wednesday, with the biggest moves around 4 p.m. New York time. The dollar gained 2.2 percent to $1.0621 as of 2:49 p.m. in New York.
Volatility increased Wednesday as option levels known as stop orders set at certain prices were breached, according to Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management in New York.

Market Liquidity

“It looked like it was just a complete stop-fest that got triggered,” said Paresh Upadhyaya, the Boston-based director of currency strategy at Pioneer Investment Management Inc., which oversees about $244 billion. “As always is the case when you have these chunky stops in the market, it exaggerated the move.”
Luke Bartholomew, an investment manager at Aberdeen Asset Management in London, said a broader decline in foreign-exchange trading volume will cause price movements to become more extreme.
“Suddenly, with huge moves, markets just dry up,” said Bartholomew, whose company manages $504.1 billion. “Investment banks just don’t have the balance sheets that they used to to be able to make markets and warehouse risk. And that has led to big spikes.”

Increased Volatility

Average daily volume slid 11 percent to $355 billion on Thomson Reuters’ foreign-exchange trading platforms in February from $398 billion in January, according to data on the company’s website. On ICAP Plc’s EBS platform, volume slumped 27 percent to an average of $94.1 billion a day, from $129.6 billion a month earlier.
Bloomberg LP, the parent company of Bloomberg News, competes with Thomson Reuters in news and currency-trading systems.
“Markets will now primarily be reacting to any important economic data,” Morgan Stanley strategists James Lord and Meena Bassily in London said in a note. “This will lead to increased volatility in financial markets before the Fed’s decision to hike.”

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