Where has all the volatility gone?

While long-term currency investors and fundamental analysts are concerning themselves with numerous aspects of currency movements, there is only one thing currently on the mind of traders: volatility. In a word, volatility has virtually disappeared from currency markets over the last year, as most major currency pairs (namely the USD/Euro) are trading in tight ranges. Some would say that this is a product of a more perfect market- as more participants have driven down the margins of error that are synonymous with volatility. Along the same lines, many hedge funds have piled into currency markets, buying low-volatility options contracts. The third explanation is that due to a gradual convergence of global interest rates, perhaps traders are simply unsure as to the future direction of currencies, and are simply biding their time and waiting for developments. Regardless of the explanation, if history is any guide, we will probably witness a significant spike in the next few months.

Read More: How Long Will Low Volatilities in FX Markets Last?