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 ([B]the red line[/B]) 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 ([B]the blue colored bars[/B]) 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.
Given significant economic event risk in the day?s ahead, short term vols have become very expensive as compared to their longer-term counterparts. Though this often signals that the pair is likely to range as the volatility curve flattens, we are obviously reluctant to call for quiet conditions on such high short-term implied volatility. Our intuition tells us that volatility is likely to persist in the week ahead before any worthwhile turn in the options market.
[B]SPOT PRICE[/B] [B]READING[/B] [B]1.4185[/B] [B]Moderate Volatility[/B] [B][/B] [B][/B] [B]LAST WEEK'S SPREAD[/B] [B]-0.10[/B]
The volatility curve on the British Pound Sterling is very similar to that of the euro, with a busy economic calendar sending short-term implieds significantly higher through recent trade. Given that such gains have come within a relatively small time frame?coinciding with a rise in longer-term volatility?we believe that the GBP is likely to see whippy price movements in the days ahead.
[B]SPOT PRICE[/B] [B]READING[/B] [B]2.0390[/B] [B]Moderate Volatility[/B] [B][/B] [B][/B] [B]LAST WEEK'S SPREAD[/B] [B]-0.40[/B]
We were finally rewarded after two weeks of calling for a breakout on the USDJPY, as it has breached its month-long wedge formation through today?s trade. Our more recent volatility readings suggests that further volatility is likely, though our “Breakout” reading seems a bit dated. Such developments nonetheless favor price continuations as opposed to rangebound conditions.
[B]SPOT PRICE[/B] [B]READING[/B] [B]116.34[/B] [B] [B]Moderate Volatility[/B][/B] [B][/B] [B][/B] [B]LAST WEEK'S SPREAD[/B] [B]1.05[/B]
The volatility curve on the USDCAD has flattened on a sharp rise in longer-dated implieds, and our current Range-Breakout reading calls for a breach of recent trading ranges in the USDCAD. Significant event risk on the calendar obviously supports such a reading, and we have little reason to believe otherwise. Range-trading strategies may be ill-advised in the days ahead, as the Canadian dollar lines up for sizeable price movements.
[B]SPOT PRICE[/B] [B]READING[/B] [B]0.9953[/B] [B]Breakout[/B] [B][/B] [B][/B] [B]LAST WEEK'S SPREAD[/B] [B]-0.03[/B]
The AUDUSD has traded within a fairly wide range through the past week of trade, but a jump in longer-dated volatility suggests that price action may pick up in the near term. A busy calendar further confirms this notion, as the market-moving US Nonfarm Payrolls report may have a particularly pronounced effect on the AUDUSD. The dollar-linked volatility is obvious, but the pair could likewise move on subsequent price chances in US stock markets and changing risk aversion.
[B]SPOT PRICE[/B] [B]READING[/B] [B]0.8898[/B] [B]Breakout[/B] [B][/B] [B][/B] [B]LAST WEEK'S SPREAD[/B] [B]1.75[/B]