FX Daily Volatility in Different Months

I was thinking the other day that FX is perhaps the most difficult thing to trade of all asset classes because with most other financial assets, say bonds, stocks, ETFs, and commodities, you can pin down what is behind a move with more ease. For currencies, you have to think about each side of the pair, and think about the different factors affecting each side and how they stack up against each other. It is therefore not straightforward that you should find patterns in FX that are consistent like in other assets.

Still, there is reason to be hopeful that efforts to find consistent patterns in FX would not be futile. Studies such as Girardin & Salimi Namin (2019)1 posit that if there is a seasonal outperformance of one country’s equities over another, then the associated capital flows would lead to seasonal effects in FX. Looking for such patterns can be useful. I will give FX seasonality exclusive treatment in another post. Here I focus on volatility, monthly vol to be specific and then intra-day vol in the next post. Ito & Hashimoto (2006)2 observe increases in intra-day volatility at the beginning and end of the Tokyo and London sessions for the EURUSD and USDJPY, but not in the New York session. I’ve done a similar analysis for 60+ currencies and I will make a post about it next.

For this post, I calculated the average trading range (in percentage terms) of about 60 currencies. The reason I’m not using pips here like in the previous EURUSD profile is because some currencies like USDMXN move by a lot of pips but a small percentage so that would distort the results. Here’s how the currencies would rank if I measured moves in pips.

And here is how they line up when ranked by their average range in percentage terms.

Much better, don’t you think? You will note that there are ‘currencies’ like WTIUSD, FRXEUR, XAUUSD, which are not really currencies but the prices of oil, the French equity index and gold in USD and EUR terms. These are the most volatile. They are followed by emerging market currencies against the USD and also ZARJPY which is also an emerging market currency.

The most volatile G10 FX is NZDJPY followed by it’s fellow antipodean AUDJPY. Major pairs and their crosses fall between 0.5%-1% daily ranges except EURCHF which is the least volatile G10 FX. The least volatile currencies overall are EURDKK and USDHKD.

This is great to know but I thought there would be more edge in looking for monthly seasonality of volatility for different currencies, or intra-day FX volatility seasonality based on the different sessions or times-of-day. To make it easy to read, I calculated descriptive statistics using data for the entire study period.

Average Daily Moves in FX

We’ve seen that WTIUSD is the most volatile currency moving about 3.5% daily on average. Here we see that it moves about 3% for most of the year except in Q1 when it’s volatility increases by one percentage point to peak above 4% in April and then it drops to approx. 3% over Q2. It’s volatility increases again slightly in November by about 0.4 percentage points.

WTIUSD is the price of oil in USD and it is likely that the seasonality seen here is due to seasonality in oil prices. I checked an it is. Here is a chart of that.

It goes to show that there are reasons behind the patterns in FX monthly vol.

Most of the currency pairs show a pattern of volatility picking up around quarter-end i.e March, June and September except for December when vol is low. There is not much to say about these charts besides that since I do not want to report what the charts show Instead, you can use the charts as a look up table each month and keep that in the back of you mind when making volatility considerations for a specific pair.