Have we seen the end of volatility in the currency markets?

Jake Cordell
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Currencies have been gaining and losing value like never before
Currencies have been gaining and losing value like never before (Source: Getty)

In the hours after the referendum, sterling suffered its largest ever decline in the era of free-floating currencies.

The pound fell from $1.50 just after the polls slammed shut to $1.33 as the count showed the Brexit camp were out in front.

Sharp spikes up and down in the value of sterling characterised the referendum campaign. By mid-June, the pattern was well established. A good opinion poll for Remain and sterling rallied, when Leave took a lead, it tanked.

In June, there were more days when the currency moved up or down by 0.5 per cent than when it didn't - big shifts in a market which is measured by trillions of pounds a day.

Excluding the two trading days immediately after the referendum, intraday movements between sterling and the dollar have remained sharp for the past three months. Volatility was especially high in the brief period between David Cameron's resignation and the confirmation Theresa May would take over the keys to Number 10.

With the referendum vote out of the picture, and a new prime minister in office, what does the picture look like for volatility on the currency markets? Are massive intra-day spikes a thing of the past, or will the pound still be driven by the wild reactions to the fallout from the vote?

Societe Generale's Kit Juckes said that while measures of volatility have "quietened down" to their lowest levels in recent months, they are still up on last year's average, implying heightened uncertainty among traders.

Simon French said a falling off in volatility as implied by future markets "suggests sterling is no longer the heavily geared trade it was in the run up to and immediately following the referendum."

Others, however, feared talk of a calmer market could be slightly optimistic. "One would hope the most volatile period for sterling has now passed us, although given how 2016 is shaping up, you can never be too sure," said Jeremy Cook of World First.

"The overall tendency for currency markets to overreact and then adjust has been the case for much longer than the referendum," said Nina Skero, a senior economist at the Centre for Economics and Business Research (CEBR).

"We can still expect some volatility. If there's an event current markets will tend to react very quickly. However, we aren't expecting any major announcements [in terms of the Brexit negotiations] so there probably won't be quite as many news stories or events for currency markets to react to," she added.

World First's Cook said he expects sterling to be characterised by "a slow burn of weakness, as opposed to short, sharp falls" over the coming months.

It's not all about sterling

The potential for heightened volatility is just the preserve of the UK. "Monetary policy will also probably contribute to choppiness, as we are beginning to see the divergence of monetary policy on each side of the Atlanatic, while the printing presses keep whirring in Japan and Europe," said Hargreaves Lansdown's Laith Khalaf.

In the US, the looming prospect of a Trump in the White House could also shift markets substantially. "Big intraday currency moves could easily be seen should the Republican candidate for President emerge victorious," said Cook.

Read more: Cheer up, Friday was only the ninth worst day in the history of sterling

Overall, however, the kind of swings seen in the two days after the UK referendum - an eight per cent fall against the dollar followed by a 3.5 per cent fall the next day, have almost certainty been written off.

"That said, there are still events that could result in a greater-than-usual degree of uncertainty, which would play out in wider intraday swings," said Caxton FX. "These include a Trump presidency, the bankruptcy of Italian banks, and the invocation of Article 50."

So traders, you can stop holding onto your hats quite so tightly. Thought probably best to keep a hand there just in case.

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