Forex Volatility Risk Substantial on Key Week Ahead

• Extreme Swiss Franc volatility leads to a surge in broader FX volatility prices/expectations
• Exchange rate risk very high as traders fear continued turbulence
• We favor high-volatility strategies and reduced leverage through foreseeable future

Unexpected action from the Swiss National Bank has left markets on edge, and elevated forex volatility prices warn of major market moves. Here’s what we’re watching.

Our DailyFX Volatility Indices show that broader FX market volatility expectations have hit their highest levels in nearly five years—dating back to the ‘Flash Crash’ of May, 2010. An obvious shift in market conditions warns that large currency swings remain likely ahead, and this is especially true for the Swiss Franc and other European counterparts. We will shift our trading focus to higher-volatility systems and curtail leverage/exposure accordingly.

Forex Volatility Prices Surge as Markets Absorb Post-Swiss National Bank Price Moves

Data source: Bloomberg, DailyFX Calculations

The week ahead seems especially risky given a highly-anticipated European Central Bank monetary policy decision as well as Greek elections threaten big moves across Euro pairs. A strong majority of traders believe the ECB will announce unprecedented quantitative easing measures, and those expectations help explain why the Euro has fallen to fresh multi-year lows against major counterparts. Yet there remains ample room for surprise, and traders should express caution ahead of what promises to be a highly market-moving event.

In terms of trading strategy we will thus focus on trading techniques which tend to do well in fast-moving markets. Past performance is NOT indicative of future results, but our Breakout2 trading system tends to do well when volatility prices have risen. It is nonetheless critical to note that elevated volatility risks can work against us, and we’ll look to trade on lower leverage through the foreseeable future.