Trading in the euro is set to be more volatile this month than in December as the currency is plagued by fears of a sovereign debt crisis emerging in the 17-member monetary bloc. The conclusion is based on the standard deviation of forecasts in the January currency survey, coupled with the actual levels of one-month annualised volatility seen last month.
The poll implied monthly annualised volatility of 12.0 percent for the euro against the dollar in January, up from the 10.5 percent seen in December. For the yen against the dollar, the poll suggested a volatility of 9.1 percent, unchanged from the actual volatility seen last month.
For sterling against the dollar, volatility was seen falling to 7.6 percent this month from an actual 9.7 percent in December.
Last year proved rocky for currency markets as they dealt with uncertainties in the eurozone and a slow start to the US recovery. The euro and sterling suffered net losses against the dollar of 6.6 percent and 3.5 percent respectively in 2010.
The yen reached its strongest level against the dollar in 15 years, even as the Bank of Japan actively intervened to impede a rapidly strengthening currency - which is detrimental to the nation's export economy. Analysts say the divergence of forecasts in Reuters currency polls offers a leading indicator of exchange rate volatility in the following month.
Statistical analysis suggests that the more analysts' forecasts diverge for a currency pair, the higher the actual one-month annualised volatility is likely to be in that currency in the following month.
Estimates of future monthly annualised volatility are used to calculate the value of currency options, which give investors the right to buy or sell a currency at a fixed price in the future. Generally, as a measure of financial risk, the wider the expected trading range for a currency the higher the cost of purchasing an option to trade it.
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