What’ up (or down) with vol?
A clear trend has been lower implied EUR/USD vol ever since a Q3’11 high (with an interim bounce during spring this year when overall risk appetite became sour). Since Jul this downtrend in vol has become increasingly clear with the 3mt implieds (dark blue line) dropping from +13% alongside the 3mt realized historical vol (red line) and the 3mt rolling “average true range” Purple line) down to 90pips from a summer peak at 125pips. This is seemingly a steady trend leading into pre-Lehman levels when the 3mt implieds went for ~5% before exploding during 2007-2008 on the full fledged financial crisis. The ongoing downtrend in vol is likely linked to the non-trending spot, but there are arguments for consideration with the 1mt 2std dev Bollinger Band width coming out of a trough and is now scoring better than its 3mt average (middle graph). Should EUR/USD spot again sharply Uturn around recent tops and extend the following move back into the low end of the autumn range around 1.26 (together with European stock markets likely again underperforming those in the U.S.), historicals are thought to pick up notably and implieds with it. – If not, the 3mt implieds will likely move closer to the 5% mark whether you think overall risk environment is as good as it was before Lehman or not – and in such conditions, FX carry will start to count more loudly.
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