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The FX market continues to show some promising volatility, with the ultra-depressed levels from late 2012 giving way to more classic cross moves, "with plenty of swings, yet fairly dominant trends" FXWW founder Sean Lee describes the current conditions. The yen is the exception, showing no signs of pausing its counter-trend progress.

As per the rest of G10 currencies, the notorious weakening of the CHF continues to be the star theme so far, together with the mentioned yen recovery. The euro has failed to live up to the upside expectations after some verbal intervention from Eurogroup President Jean−Claude Juncker,while the U.S. dollar is holding pretty well after recent losses.

As Sean Lee notes:

These are markets for buying dips and selling rallies in various 'legs' of the crosses and real FX traders will be having a ball...

Meanwhile, NAB observes:

We continue to see funds flowing out of non-eurozone European currencies and which have acted as safe haven magnets during the eurozone's existential travails of 2011 and 2012.

Referring to the increasing levels of volatility in the markets, Societe Generale FX strategist Sébastien Galy, believes it "is an important sign not of impending doom, but of a global reallocation of capital."

Mr. Galy expands: "Old regimes are dying and FX is the first sign of this process. We are seeing this in JPY, are starting to see this in CHF and will eventually see it happen in USD, hopefully in H2 or Q4 as the U.S. economy steadily recovers."

As capital flows make their way out of low-risk profile territories, "the allocation between bonds and equities as ultimate 'domestic' claims to global growth will eventually also become more unstable" the analyst notes. For now, "these wobbles will be crushed as monetary policy remains expansive globally, but the process started. FX is the warning sign", Sébastien concludes.

But on the global scheme of things, the threat of downgrades is never too far, which may easily alter the apparent stability of risk assets. One clear example was seen yesterday (Tuesday), when a fresh warning from the ratings agency Fitch was issued to the U.S, stating that a debt ceiling failure would likely cause a ratings review.

NAB strategists note:

Monday night's verbals from U.S. President Obama and then the response from some Republican Congressman is further raising unease with respect to the likelihood of the debt ceiling being lifted before the 'mid-February to early-March' drop dead date range suggested by outgoing U.S. Treasury Secretary Tim Geithner yesterday.

To make matters worse, the world bank re-assessed its global growth projection for 2013, now forecasting 2.4% vs 3% last.

Giving some clues on the possible short-term direction in the most followed pair in the FX market, Valeria Bednarik, chief analyst at FXstreet.com, sees the hourly chart retaining a bearish tone ahead of Europe, "with 20 SMA above current price and indicators heading lower below their midlines..." although she says the downside still seems tough; "a break below the Fibo level however, should put the pair under pressure, with 1.3180 strong support level then at sight", she adds.

Source: FX Volatilty Is Back: Yen Strengthens