CALM SHOULD RETURN FOR FX MARKETS

JUST how volatile was currency trading last week? To understand it better, let’s take a look at euro-Swiss franc and dollar-Swiss franc – two pairs that carved out enormous ranges in last week’s tumultuous markets. For the past 250 trading days, the average daily range in euro-Swissie has been 149 points. Last week it expanded to 474 points, and last Thursday it reached a staggering 664 points. In dollar-Swissie, the range expansion was similarly impressive. On a yearly basis the average range was about 110 points; last week that range nearly tripled to 293 points – and on Thursday, when volatility was at its apex, dollar-Swissie put in a range of 449 points. As the famous financial blog Zero Hedge put it, “Pre-intervention, the two week rise in the Swiss franc was a 7.8 sigma, one in 300 trillion event.”

The recent moves in the currency markets have been staggering. Still, we also know that while price is notoriously difficult to forecast, volatility tends to be mean-reverting, suggesting that traders who are counting on further rollercoaster price moves in the Swiss pairs may be sorely disappointed.

After appreciating to record highs against the euro and the dollar on safe haven flows, the franc quickly weakened last week after the Swiss National Bank suggested that it might peg the unit to the euro.

Although the reality of a currency peg is highly unlikely, just the possibility of such a move was enough to send dollar-Swiss franc and euro-Swiss franc shorts scurrying for cover and both currencies verticalised in one of the most vicious short covering rallies ever seen. However, these gyrations will likely cease this week. With no major economic data on the calendar and with the European Central Bank making a concerted effort to prop up the periphery credit markets, traders’ attention may drift back to the beach, as everyone enjoys the last few weeks of summer before coming back to do battle again.