Amazingly after the FOMC last week delivered the equivalent of a 20bp surprise for 10 year Treasury yields, implied vols for the USD versus the majors still slipped across their respective curves. The adjustments were not small – 1yr implied vols for both EUR/USD and USD/JPY declined by half a vol on the day! The rationale behind this was that 1) The dovish Fed signaled there would be less divergence between Fed policy and those pursued by a dovish ECB and BOJ; 2) clients were expected to be much more active, seeking protection and taking directional bets if the Fed took a more hawkish line; and, 3) the market still fears a EUR/USD downside break, with spot and implied vols persistently negatively correlated through 2013.
Read the full report: FX Daily
Deutsche Bank