Forex Seasonality: The Trends of Currency Volatility

Last updated 4/17/2009 9:39 AM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

In the first few months of 2009, volatility in the currency market has exploded.  Surprisingly enough, this may be in line with seasonal trends.   The following charts highlight the trend of average volatility in the EUR/USD, USD/JPY and the GBP/JPY over the past 10 years using three month at the money option volatilities.  What these patterns suggest is that volatility in the currency market should compress into the summer months and pick up once again in August.  Although the current market environment is unlike any other that we have seen in the past 50 years, most of the bad news has already been priced in and therefore surprises will probably be limited.   Volatility usually picks up when there is a ton of bad news causing massive and broad based liquidation.  Over the next few months we should begin to see the fruits of all the global stimulus and therefore stability could mean lower volatility.  

Comments (2)

Anees

June 19, 2009 at 09:56 PM ET

Hi Kathy,
Dont you think the quarterly earnings reporting season in July will increase the volatility in July..and I hear most of the governmental activities go on vacation in August meaning less volatility in August...
What do you say?
Best Regards
Anees

klien

June 22, 2009 at 08:49 AM ET

If July earnings reports have an impact on the currency market, it would show up in the past 10 years worth of data. This chart was based upon average volatility so of course, we can have an uptick any single year. Volatility in FX tends to rise in August as indicated by the chart above.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.