Just about every time someone in the news media talks about the forex market – unless they are specifically familiar with it – they seem to do so with some kind of descriptor phrase related to how risky and volatile it is. I've written before on the subject of comparing volatility across markets. I think, though, it's worth taking a look at recent market action and see how things stack up.
Take a look at this chart, which compares the daily % range of the S&P 500, the Dollar Index, 10yr Treasury Note yields, Gold, and Oil. It provides a good look at what's been going on in the markets since the beginning of July (though not including today's action – August 18, 2011).
What the chart plots is the daily price range for each market. It's expressed as the day range as a percentage of the day's mid point [(H-C)/((H+L)/2)].
The most striking feature of this chart is how volatile the 10yr Note yield has been. Now, this is looking at yields, not price, so probably overstates the volatility seen in those instruments somewhat, but still we would expect a fixed income market to be on the lower end of the volatility scale. The S&P downgrade of the US is clearly seen on the chart in the big spike, but we can see that yields were quite volatile even without taking that period into consideration.
It won't be much of a surprise to see Oil as the next most volatile market.
Take a look at what market is consistently at or very near the bottom every day, though. The pink line is the Dollar Index. That means the Index consistently has low daily prices ranges compared to the rest of the markets.
Just to confirm all of this, take a look at this second chart looking at daily changes rather than ranges.
This chart plots the absolute value of each day's change (open to close), meaning all values are plotted as positives. The pattern is pretty similar to the first chart. Rate volatility has been high, with the Oil market often not far behind, along with stocks. The USD Index, meanwhile, holds to the lower end of the range, very rarely venturing beyond a 1% change for a given day.
As I noted in my post last week, a lot of what’s going on in the markets right now is fundamentally driven. There is an element of the risk aversion pattern, but it’s not as simple as it was previously. As they always do, the markets are constantly shifting and changing. Gold is being driven by the massive amount of liquidity in the financial markets due to central bank activity (and/or the expectation thereof). Stocks and oil are reacting to retrenchment in the global economic situation. The currency markets have a lot of different influencing factors, not the least of which is the prospect of central bank intervention from Japan and Switzerland. And for now, at least, the dollar is not the singular safe haven in the currency markets, making it less prone to big swings than in the past.
These sorts of situations are the ones which tend to separate the trading wheat from the chaff. Those who can adapt to the new market conditions will survive and maybe even thrive. Those who cannot, will fall by the wayside, just like all those folks who developed trading strategies based on low volatility did when things changed in 2007.