Euro volatility to surge back in January

The euro will be the most volatile major currency in January as the bloc's debt crisis lingers on, keeping alive fears of another credit crunch and with the AAA credit rating of some of its top members in the balance.
That conclusion is based on the standard deviation of forecasts in the January Reuters foreign exchange poll, clubbed together with the actual one-month annualised volatility seen last month.
Annualised volatility for the euro is expected to shoot back up to 10.8 percent from last month's 7.8 percent. The euro has averaged annualised monthly volatility of 10.1 percent over the last decade compared to 9.9 percent in the yen followed by 8.9 percent in sterling.
"Volatility, in relative terms, is probably around the middle of the range that it was last year. But, I do believe it will remain quite elevated this year," said Mitul Kotecha, chief foreign exchange strategist at Credit Agricole CIB.
The European Central Bank (ECB) is widely expected to cut its benchmark interest rates further while conducting more liquidity providing operations to give banks access to cheap, unlimited funds.
This will keep downward pressure on the euro, which touched a 15-month low of $1.283 versus the dollar, a near-16 month low against sterling, and an 11-year low against the yen on Thursday.
The euro zone debt crisis was a major cause for the nearly 32 percent rise in the CBOE volatility index last year. Yen volatility is expected to rise to 6.7 percent in January from its 4.8 percent actual in December, while sterling volatility looks set to fall to 6.7 percent from 8.6 percent, according to the calculations.
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.