Investors are pricing in sizable currency volatility in 2012 - and that has trading implications for you.
Currencies sure have had quite a year - but there isn't much to show for it, says Alan Ruskin, global head of G10 FX strategy at Deutsche Bank. "We now have every G10 currency, barring the yen, within 2% of its starting point versus the dollar," he wrote in a note to clients. And 2010 wasn't all that volatile either, he says.
That makes it all the more surprising that investors trading options are pricing in significantly higher currency volatility for 2012. This is especially true of the British pound against the dollar, the euro against the pound, the euro against the Swedish krona, and the euro against the Norwegian krone. According to Ruskin, that's potentially positive for riskier currencies.
"The good news is that there is a sense in the currency markets, some fear of the worst," he told me. "If the European authorities can put some of the uncertainty to rest, we could see a risk rally."
That's a big if. But remember, German Chancellor Angela Merkel and French President Nicolas Sarkozy are talking, and there is a European Union summit looming. Stay tuned.
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