No volatility - no income for the trader. What is the Central Bankers' fault?
Just 10 years ago the EUR/USD had a fluctuation range of 2,400 pips in just one quarter. In the first quarter of this year, the fluctuation range barely reached the level of 400 pips.
The time of aggressive monetary policy has passed. The mood of the world's central banks is becoming more and more pigeon-holed, and this is simply killing speculative trading on the foreign exchange market.
Central Bank sticks in the wheels of traders
Even a novice trader knows that profits in the foreign exchange market are formed due to differences in exchange rates. The cheaper to buy and the more expensive to sell is the essence of trading. The difference in price is the trader's profit, and the bigger it is, the more trader can earn.
Central banks of the world, not excluding the U.S. Federal Reserve, have changed their sometimes more, sometimes less aggressive monetary policy, increasingly forcing financial stimulation of their economies. As a consequence, the volatility of currency pairs, which is not the highest in recent times, simply collapsed to levels that markets have not seen in the last five years.
Currency traders have already tried a lot of methods in search of obvious divergences between central bank monetary policy makers in an attempt to predict changes in the exchange ratesto make a profit on speculation. Every day it is getting harder and harder to see the reasons why one currency might change its rate in pair with another. This has already led to the fact that many hedge funds have left the currency market, and the daily trading volume is steadily decreasing.
Anti-record volatility
More recently, investor panic has caused a serious increase in volatility in stock markets. However, it had no effect on the currency market at all.
The Deutsche Bank index, which shows the volatility of exchange rates, has fallen to a record low for almost a five-year period.
After the U.S. Federal Reserve refused to raise interest rates further this year and the ECB further increased its dovish rhetoric, exchange rate fluctuations of the currency pair EUR/USD, which is the most popular among currency traders, significantly decreased.
Ten years ago, the average volatility of the euro/dollar pair in one quarter was about 9 cents, in one quarter a record 24 cents, this year the figure is a little less than 4 cents.
In the pair USD/JPY, the volatility of which is traditionally higher than the euro/dollar, the range of exchange rate changes fell to 600 points. Such periods of low quarterly volatility in this pair over a thirty-year period can be counted on the fingers of one hand.
As long as the monetary policy of the world's central banks will move in one direction - easing and financial stimulation, one should not expect growth of volatility in the currency market. The incoming economic statistics can cause short-term bursts of activity, but they will not be enough for a rally of any currency, nor for the fall of its exchange rate. This means that speculative earning opportunities for traders, unfortunately, are limited.