Currency volatility: Look on the bright side
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Foreign Exchange

Currency volatility: Look on the bright side

Recent events have given credence to the old adage “another day, another dollar”.

It has also blown a hole in my long-held belief that there was only so much volatility in the world. As I wrote nearly two years ago, if, “one asset was having a bit of an old wang, dang, doodle, then another would be doing nothing”. 

Movements within the FX market alone may be sufficient to discredit that theory. Numerous different currency pairs moving up and down like the proverbial whore’s drawers. For instance, it wasn’t that long ago that the AUD was pushing up to near 25-year highs against the USD. This week, it plunged to a five-year low. And even these movements were nothing compared with what was going on in many submerging currencies. I’m told that implied vol in the Icelandic króna (ISK) moved rapidly up from 25% to 150%, before falling back to 0% when the currency was briefly pegged. Now that it is floating again, it seems nobody really knows where vol is, which suggests the ISK is no longer a proper currency – if it indeed ever was one. Throw into the mix completely screwed money markets, let alone the carnage in equities, turmoil in credit and mayhem in commodities, and it is clear that we need a new theory of volatility.

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