Euro, Sterling Break To Record Highs - Volatility Jumps

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.
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As anticipated, euro implieds rocketed higher throughout the week as the key technical level at 1.3684 was broken to the upside. The jump above helped to kick short term activity higher, lending to a positive differential, currently trading at 5 basis points wide compared to last week?s negative reading. Additionally, the longer term received support, rising to a respectable 5.65 percent. Now, with the currency trading higher on market momentum, volatility is also expected to remain loftier than before as dollar bearishness looms over the market. The notion will place the 1.3800 level into play as the key technical level that would add to additional potential upward.
Sterling vols additionally moved higher in tandem with euro counterparts as the underlying currency proceeded to break through key technical ceilings above the 2.0200 figure. For the week, the move helped boost the longer term measure, currently trading at 5.625 percent. However, the short term saw a dropback as the spread continued lower below the zero line pricing in at 38 basis points wide. Worse than the previous week?s measure, the decline looks attributed to the fact that activity remained relatively tamed for most of the week aside from the most recent pop in price action. Nonetheless, our model puts forth suggestions of a continuation in the current uptrend, regardless of the direction in the underlying spot price. With plenty of theories on the sterling top, the key level to watch remains in the 2.0450.
Yen vols spiked on the week, jumping from the 6.5 percent base last week, rising to 7.85 percent over the course of the last five sessions. Attributed to the increase was a breakdown of the USDJPY currency pair, with the price action falling briefly through 122.00. Additionally anticipated, the currency?s move was able to spark up activity in the longer term measure, however, kept the spread at bay trading 15 basis points wide. Comparatively, the spread was wider above the zero line at 30 basis points last week. Ultimately implieds are expected to continue on their path in the short term as indicated by our volatility assessment, putting the 121.00 figure in focus to the downside.
Continuing to range trade, implieds in the Canadian dollar held steadfast to the 7.5 percent level, even as the Bank of Canada interest rate decision came and went. With the market expecting the 25 basis point rate hike, activity was kept to a relative minimum as the currency continues to consolidate at the 1.0500 figure. With the longer term measure trading at 7.35 percent, the spread actually declined to trade 35 basis points below the zero line. The new figure is a vast comparison to last week?s positive 23 basis point trade, likely attributing to the short term tepid activity. As a result, this week?s evaluation continues to show a range bound scenario for the USDCAD with upside bias to the 1.0600 figure.
Laying low for the week, implieds continued to range trade as the currency?s spot price kicked up above the 0.8600 figure over the course of the week. The longer term measure is pricing in at 7.75 percent, relatively unchanged, with the spread just 3 basis points lower at 47 bps wide. Incidentally, the currency?s short term pop above the key resistance ceiling helped to keep the spread as wide as last week?s, with the short term adding plenty of support. As a result, with implieds where they are, the range bound scenario continues to persist with any advancements upward being kept to a minimum. However, should the current key support of 0.8600 hold formidably in the near term, vols may be lifted as AUD bids make a push for the next 0.8700 technical level.