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FX: Volatility Going into Year End

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The following charts of 1 month average option volatilities in the 3 major currencies offer some additional clues:

On a seasonality basis, the last three months of the year tend to have the highest volatility. As the graphs indicate, trading tends to be more muted over the summer and picks up in September and October into November and December. Traditionally volatility increases around this time of year because it is the last opportunity for investors and funds to generate alpha before their books are closed at year end. Additionally, many international businesses repatriate their earnings in December for fiscal year end which can cause more volatility. We expect this historical trend to hold in 2011l because of the number of uncertainties in the market - Greece is still at the brink of default and does not know whether it will receive its last bailout payment. Investors are still waiting to see if the European Financial Stability Facility will be increased and if the ECB will lower interest rates. And lets not forget that the Federal Reserve needs to decide if they want to reinitiate Quantitative Easing before the end of the year. There are a lot of moving parts in this global economy that could impact volatility from now to December and for currency traders this leaves the choice of reducing your exposure to accommodate wider stops or to focus on shorter term trading to take advantage of the increase in volatility.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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