Japanese Yen Pairs Primed for Volatility, JPY May Gain Further

[DailyFx]

Implied volatility is one of the most tried and true methods for objectively measuring expected volatility in the spot market. Derived from currency options with different maturities, implied volatilities are used to help predict potential movements in the spot market and is one of the most popular strategies of systems traders and other professional hedge funds.


At its most fundamental, the basic and intuitive interpretation of this implied data is often the most telling for traders. Taken alone, a steady rise in the longer-term implied volatility (the red line) is indicative of a strengthening trend; while inversely, a decline often reveals that a period of range or consolidation in spot is ahead or already in place. Additionally, the histogram or spread between the shorter and longer-term implied volatilities (the blue colored bars) tells a different perspective. As the histogram rises, volatility is expected to pick up faster in the near future relative to the longer-term range. Ultimately, this increases the probability of a breakout scenario in the underlying currency.


EURUSD

Euro volatility has risen since last week’s report, but we have essentially seen price remain in a wide range through recent currency trading. Implied volatilities on very-short-term EURUSD options are trading fairly significantly below their longer-term counterparts—suggesting that few traders expect explosive movements in price in the coming days of trade. Yet the recent turn higher in 1-month vols suggest that price movements may nonetheless pick up in the medium term. Mixed signals lead us to believe that we will see Moderate Volatility in the week ahead. SPOT PRICE READING 1.548 Moderate Volatility LAST WEEK'S SPREAD -0.55





GBPUSD

Our outlook for the GBPUSD is unsurprisingly similar to that of the EURUSD. The recent turn in 1-month vols suggests that markets are gearing up for larger price moves through the medium term, but a sharply negative short-long volatility spread leads us to believe that few expect these moves in the week ahead. This unfortunately leaves us with no clear bias as to whether we may pursue low-volatility range based strategies or higher risk/higher reward breakout strategies. SPOT PRICE READING 1.9521 Moderate Volatility LAST WEEK'S SPREAD -0.04





USDJPY

The Japanese Yen is in a clearly different position than its European counterparts, as a broad jump in implieds tells us that markets are gearing up for further large moves in price. Look to trade breakout strategies across all JPY pairs. Given that the USDJPY holds a clearly negative correlation with market volatility, this leaves us with a bearish bias on the USDJPY and other JPY crosses. SPOT PRICE READING 102.9 High Volatility LAST WEEK'S SPREAD -0.32