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Sterling market shows little sign of panic ahead of vote

Article By: ,  Financial Analyst
September 17, 2014 5:58 PM

In all kinds of markets, it’s a truism that volatility tends to rise during uncertain times.

In markets when we say ‘volatility’ we usually mean ‘variability’: meaning the difference between the highest and lowest prices of an asset during a given period; weekly, daily, hourly, etc. Over a period of say a month, the rate of variability can tell us how quickly prices are changing. Faster price changes tend to go hand in hand with times of increased market excitement. When the ‘excitement’ gets more extreme, the volatility levels can often reflect market panic.

A good example was during the credit crunch at the end of the last decade, which reached a peak in October of 2008.

The surge in volatility clearly shows in the weekly chart below. (‘Volatility’ is the blue line at the bottom half of the chart.)

 

Weekly GBP/USD ‘vol.’ jumped from about 6 pips at the beginning of August to a high of 24 pips by mid-December, if the chart, using data from Thomson Reuters, is to be believed.

So cast your eye about 6 years to the left to recent weeks of this year.

Whilst the pound itself is significantly lower this month compared to July, weekly vol. is actually lower than a year ago. There was a mild uptick in April, but the pound is over that now.

We get a different-looking picture if we look at the sterling/dollar chart using daily intervals. The currency pair’s rate of change has jumped from less than 2 pips a day early in August to more than 9 pips currently. That seems to suggest the sterling market has at least become more engaged with trading, as Scotland’s referendum draws nearer. But remember that 24-pip weekly vol. rate, we saw in 2008? Well on a weekly basis GBP/USD vol. is currently about 4 pips.

Yes, the Scottish independence vote tomorrow is a massive deal which will have far-reaching effects. The sterling market is aware of this and has responded to the political rhetoric from leaders of ‘yes’ and ‘no’ camps, demanding a currency union and denying one will be forthcoming, respectively.

But is the market panicking?

Not as such.

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