Forex Flash: FX volatility here to stay in 2013 – UBS

For 2013, even more central banks are adding 'puts'. “This presents markets with a dilemma, and perhaps a reason why volatility in FX has returned. Like many things in life, sooner or later we realize that too much of a good thing (especially if it is low-cost or free) becomes a bad thing, and this either decreases its value, or the need to exit comfort zones take effect. In other words, central banks believe it is time to go to extremes to trigger an extreme response.” warns Research Analyst Garth Berry at UBS.

For example, as the BoJ goes for broke, it is encouraging risk taking by even the most risk-averse investor groups, like the Japanese life insurers. If enough cash exits Japan, reflation might just happen and at an accelerating pace. Last night's FOMC minutes showed many members are still worried that the global economy still needs such protection and is not ready for an exit, but restlessness is clearly rising. According to Berry, “Sooner or later, policymakers will realize that they will never know whether the global economy is ready to exit, until it is finally tried.”