Why are currency exchange rates so volatile?


Why are currency exchange rates so volatile?

nomi king 7 months 1 Answer 133 views

Answer ( 1 )

  1. This is a really interesting and difficult question. It is a combination of a lot of factors:

    Quant trading systems that as a result of a shock event can sometimes get aligned in perfect storm. Eg. There are common signals that can cause a lot of them to be short the market, and then something happens that pushes through all their risk management stop-losses, causing them all to close their positions, which then cause everyone else who is short to also close those positions, pushing markets heavily in one position, and then it’s cheap based on fundamentals, so they all plunge back into the position again.
    However if everyone is in same position, it actually dampens volatility, because everyone is closing the positions as it moves favorably.
    Re fundamentals, it’s driven by interest rate curves, based on messaging from central banks and from expectations of movements of central banks (eg. strength of economic indicators, inflation expectations, etc).
    Also there is a lot of money just moved every day as part of people needing to pay for goods and services in other currencies.
    There is just so much activity going each way, it would be really fascinating if someone had some kind of live chart of which factors were generally driving various price moves.
    The other question is: what if you were Donald Trump or someone of influence, could you somehow effect the FX rates? If you were a central bank governor that would be illegal, but I guess if you were Kim Jong Un you could probably say something that would cause some effect? It’s just an interesting idea what could actually directly impact FX rates. Eg. it would be an easy way for Donald Trump or someone similar to make a lot of money.

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