Opinion: FX market volatility forecast to reduce

By Roger J Kerr The forex market norm is that volatility increases over the Xmas/New Year holiday period as trading volumes fall and the markets are less liquid. Traditionally the rate movements are more volatile as large capital flow/corporate orders struggle to have their risk cleared by the interbank market as the volumes traded are much lower and thus larger price adjustments are required to get the business done. My guess is that this Xmas period in the FX markets will not follow these normal patterns. The markets have had all the volatility they can handle in recent months. Market participants are either completely exhausted after a very tough year, have closed all risk positions, have no credit left for dealing limits or are out of business altogether. Whatever the reason for inactivity in the markets, the result is reduced volatility and very tight trading ranges over coming months for all the major currencies. My expectation is that the NZD/USD exchange rate will not move out of the 0.5100 to 0.5700 trading range over the next two months. The main driver is the stabilisation of the EUR and AUD currencies against the USD in similar tight trading ranges. The markets will not react to any negative economic news as the news is as bad as it gets, just about. The NZD/USD FX markets has fully priced-in short-term interest rates going from the current 5.50% to 4.50%, so no surprises from that quarter. Commodity prices are also expected to stabilise at the much lower levels, settling the AUD. About the only trade worth considering for the speculative-mined would be going short on volatility i.e. a seller of volatility!    --------------- *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com