Does Low Volatility Signal New Trends?


While stock market investors cheer low market volatility; forex traders, not so much. Mike Kulej of details how you trade in the current environment.

According to a recent report, trading volumes in the foreign exchange market declined drastically in the past few months. In some instances, activity dropped by as much as 30% in September on an annual basis, the lowest level since 2006. This trend became especially pronounced since May, when fears about Greece’s exit from the monetary union began to ease. Most people blame central banks and their policies for lower volatility, which makes it more difficult to be profitable. By some accounts, many speculative interests moved towards stocks, which might present better profit opportunities. Perhaps that is true currently, but these market conditions will not last forever.

The most affected are the Japanese yen pairs, with the USD-JPY showing the lowest volatility level in 20 years. However, most other majors are at similar levels to 2006, before the major price swings of the 2008-2009 period developed. Looking at monthly charts, we can see long-term consolidations, still fallout from the extreme price swings of 3-4 years ago. These consolidations will work themselves out eventually, giving way to new powerful trends. It is that lack of trends that is driving institutional money away from forex. Extreme behavior on the part of market participants often suggests that changes in conditions are just around the corner. We should not be surprised if volatility starts to pick up soon, with new trends emerging perhaps next year.

Click to Enlarge

The GBP-USD is a good example of how present volatility compares to historical levels.