Volatility Accident explained by professional Forex trading experts the “Volatility Accident” FX trading team.
From a volatility accident to SNB flashbacks, these are some of the unexpected pitfalls that may strike the financial markets before year-end.
A December to Remember? – John Kicklighter, Chief Strategist
Historically, December is a consistently quiet month for the financial markets due to the abundance of market holidays and the need among funds to balance the books. However, I see a significantly higher chance this year that a volatility ‘accident’ could befall the markets between under-appreciated risks and over-extended investors. There is a record amount of leverage – both notional and thematic – being employed across the markets which makes market participants exceptional at-risk in already thinned market conditions. Consider how much return would be made by riding out a ‘long-risk’ position through the untended close to the year against the exceptional risks we face if something goes wrong.
The Swiss National Bank has a penchant for shocking markets with abrupt changes in the stance of monetary policy. Swiss inflation has trended higher for nearly two years and the key EUR/CHF exchange rate is at highs unseen since before the epic collapse in January 2015. Meanwhile, the ECB has dialed back the pace of its QE effort while most political threats seen at the start of 2017 have not materialized. If Germany muddles through coalition talks despite recent setbacks and Angela Merkel looks stable at the helm, the SNB may feel secure enough to pull back on some elements of its stimulus framework, perhaps without pre-announcing it. That might produce another sharp surge in Swiss Franc volatility.
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