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.
Sunday, May 11, 2008
Forex Video - USD/CAD Tumbles, How Will Inflation and GDP Numbers Impact Currencies Next Week?
Written by Terri Belkas and John Kicklighter, Currency Analysts
· Canadian employment data beats expectations, leads to Loonie rally.
· Heavy event risk looms next week - which indicators do you need to watch?
Stories to watch on DailyFX
· Heavy event risk looms next week - will Tuesday's US Retail Sales report be surprisingly strong?
· USD/CAD fell on Friday, but is the Canadian dollar ready to fall across the board?
· Canadian employment data beats expectations, leads to Loonie rally.
· Heavy event risk looms next week - which indicators do you need to watch?
Stories to watch on DailyFX
· Heavy event risk looms next week - will Tuesday's US Retail Sales report be surprisingly strong?
· USD/CAD fell on Friday, but is the Canadian dollar ready to fall across the board?
US Dollar: US Retail Sales Could Get A Surprise Boost on Tuesday - Why?
Advance Retail Sales are expected to fall back 0.2 percent after showing a surprising 0.2 percent gain during the month prior, but given the current economic scenario, this figure could prove to be even more disappointing when announced at 8:30 EDT.
What Are The Markets Facing?
Advance Retail Sales are expected to fall back 0.2 percent after showing a surprising 0.2 percent gain during the month prior, but given the current economic scenario, this figure could prove to be even more disappointing when announced at 8:30 EDT. Indeed, consumer confidence is rapidly deteriorating and energy prices continue to skyrocket. During the month of April, the University of Michigan consumer confidence survey plunged to a 26-year low of 62.6 while the Conference Board’s measure dipped down to a 5-year low of 62.3 on a gloomy combination of jittery financial markets, a collapsing housing sector, and oil rocketing to record highs. There is little doubt that retailers are contending with difficult circumstances as they are forced to offer the biggest discounts possible in order to draw customers, which will negatively impact profit margins. However, there is potential for the Advance Retail Sales index to actually show a positive increase as the result of prices, namely, sales at fuel stations. Indeed, this index is not adjusted for inflation and average gas prices rose above $3.50/gallon during the month and have only continued to rise.
Bonds – 10-Year Treasury Note Futures
A daily chart of Treasuries highlights the break above trendline resistance and the subsequent advance toward resistance at the confluence of the 100 SMA and 38.2 percent fib at 116-20. While we are likely to see a test of this resistance level on Monday, Tuesday’s release of US Advance Retail Sales provides significant event risk for the contract. Indeed, retail sales are forecasted to slump, which could support the case for additional Treasury gains. On the other hand, if rocketing gas prices lead the headline retail sales index to deceptively rise, the contract could pull back toward support near 115.
What Are The Markets Facing?
Advance Retail Sales are expected to fall back 0.2 percent after showing a surprising 0.2 percent gain during the month prior, but given the current economic scenario, this figure could prove to be even more disappointing when announced at 8:30 EDT. Indeed, consumer confidence is rapidly deteriorating and energy prices continue to skyrocket. During the month of April, the University of Michigan consumer confidence survey plunged to a 26-year low of 62.6 while the Conference Board’s measure dipped down to a 5-year low of 62.3 on a gloomy combination of jittery financial markets, a collapsing housing sector, and oil rocketing to record highs. There is little doubt that retailers are contending with difficult circumstances as they are forced to offer the biggest discounts possible in order to draw customers, which will negatively impact profit margins. However, there is potential for the Advance Retail Sales index to actually show a positive increase as the result of prices, namely, sales at fuel stations. Indeed, this index is not adjusted for inflation and average gas prices rose above $3.50/gallon during the month and have only continued to rise.
Bonds – 10-Year Treasury Note Futures
A daily chart of Treasuries highlights the break above trendline resistance and the subsequent advance toward resistance at the confluence of the 100 SMA and 38.2 percent fib at 116-20. While we are likely to see a test of this resistance level on Monday, Tuesday’s release of US Advance Retail Sales provides significant event risk for the contract. Indeed, retail sales are forecasted to slump, which could support the case for additional Treasury gains. On the other hand, if rocketing gas prices lead the headline retail sales index to deceptively rise, the contract could pull back toward support near 115.
Tuesday, May 6, 2008
Yen Crosses: Corrections Continue but Larger Trend Still Down
The choppy decline since the October high at 91.42 may be a series of 1st and 2nd waves. Under this count, the NZDJPY needs to remain below 88.11 for a C wave decline that will eventually come under 74.25 to remain on track. An alternate count treats the entire drop from 91.42 is an ending diagonal (similar to the EURJPY). Under this alternate, a wave 2 correction is underway towards fibo resistance in the 84/85.80 area. A rally through 88.11 would make this the preferred count. In both cases, lower prices are expected. The outcome would be delayed under the alternate count.
CHFJPY Range Bound Following Break in Bullish Trend
Trading Tip – A common cliché among traders holds that “the trend is your friend.” When applied to range trading through periods of consolidation in an otherwise trending market, this means only entering a trade in the direction of the trend. In particular, we will opt not to buy CHFJPY even though the pair is trading close to the bottom of the range because the direction of the recent breakout was to the downside. We would rather miss out on a trade and lose nothing than get long counter-trend if CHFJPY simply sinks lower from here without oscillating to the 50% Fib.
Note – Today’s market environment is not conducive to a range-bound approach with most pairs trending. Finding a range trading opportunity often means relying on exotic crosses and thereby contending with higher volatility levels. Conservative traders that are intent on following a range-bound approach should be mindful of this when evaluating these trade ideas.
Event Risk for Switzerland and Japan
Switzerland – With Consumer Price Index figures out of the way, the Swiss calendar has become substantially lighter for the rest of the week. The only remaining item on the docket is Thursday’s jobs report. Expectations are for the rate to remain at a consistent 2.5%. Traders will be wary of this ticking higher as the Euro zone exports the effects of the US malaise to the mountain nation.
Japan –Friday’s release of the preliminary estimate of the Leading Economic Index for March is the only substantial release from Japan this week. Expectations are for a sharp decline as the Japanese economy suffers high oil prices and the loss of vigor in the US export market.
Note – Today’s market environment is not conducive to a range-bound approach with most pairs trending. Finding a range trading opportunity often means relying on exotic crosses and thereby contending with higher volatility levels. Conservative traders that are intent on following a range-bound approach should be mindful of this when evaluating these trade ideas.
Event Risk for Switzerland and Japan
Switzerland – With Consumer Price Index figures out of the way, the Swiss calendar has become substantially lighter for the rest of the week. The only remaining item on the docket is Thursday’s jobs report. Expectations are for the rate to remain at a consistent 2.5%. Traders will be wary of this ticking higher as the Euro zone exports the effects of the US malaise to the mountain nation.
Japan –Friday’s release of the preliminary estimate of the Leading Economic Index for March is the only substantial release from Japan this week. Expectations are for a sharp decline as the Japanese economy suffers high oil prices and the loss of vigor in the US export market.
Dollar Trades Lower As Risk Aversion Recants Bullish Outlook
Dollar Trades Lower As Risk Aversion Recants Bullish Outlook
Despite a quiet economic calendar, the US dollar was on the retreat Tuesday against most of its major counterparts. For those majors that weren’t caught up in cross fundamental currents, the greenback selloff was partly a carry through on the single currency’s ongoing reversal of last week’s strong rally. There was also a more active component to the decline in the form of a general souring in risk appetite – but more specifically, American risk. Ben Bernanke and his fellow Federal Reserve policy makers have made a remarkable effort to head off a recession and stabilize the broad financial markets with a cumulative 325 basis points of rate cuts and unusual means for injecting liquidity into the frozen credit markets. In fact, after last week’s quarter point cut from the FOMC, the market is pricing in an 86 percent chance that the Fed Funds rate will be left unchanged at 2.00 percent. However, recent data has offered little reason to suspect financial conditions are improving nor that the economy would avoid a contraction in the second quarter. Today, an article on Bloomberg News quoting a study from Jupiter eSources LLC revealed bankruptcy filings among businesses rose 49 percent in the year through April – the most in a year. With individual filings included, the rise over the same period measured 31 percent. This highlights an often overlooked concern: that the Fed’s efforts haven’t been passed through to the consumer – a necessity if growth is to recover. Looking ahead to tomorrow fundamental activity picks up modestly with March pending home sales and credit spending. Both indicators have little market moving precedence.
Despite a quiet economic calendar, the US dollar was on the retreat Tuesday against most of its major counterparts. For those majors that weren’t caught up in cross fundamental currents, the greenback selloff was partly a carry through on the single currency’s ongoing reversal of last week’s strong rally. There was also a more active component to the decline in the form of a general souring in risk appetite – but more specifically, American risk. Ben Bernanke and his fellow Federal Reserve policy makers have made a remarkable effort to head off a recession and stabilize the broad financial markets with a cumulative 325 basis points of rate cuts and unusual means for injecting liquidity into the frozen credit markets. In fact, after last week’s quarter point cut from the FOMC, the market is pricing in an 86 percent chance that the Fed Funds rate will be left unchanged at 2.00 percent. However, recent data has offered little reason to suspect financial conditions are improving nor that the economy would avoid a contraction in the second quarter. Today, an article on Bloomberg News quoting a study from Jupiter eSources LLC revealed bankruptcy filings among businesses rose 49 percent in the year through April – the most in a year. With individual filings included, the rise over the same period measured 31 percent. This highlights an often overlooked concern: that the Fed’s efforts haven’t been passed through to the consumer – a necessity if growth is to recover. Looking ahead to tomorrow fundamental activity picks up modestly with March pending home sales and credit spending. Both indicators have little market moving precedence.
Saturday, May 3, 2008
Japanese Yen May Continue Falling on Low Market Volatility
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
Implied volatilities on EURUSD options have fallen significantly off of their multi-month peaks, as a general recovery in risk appetite and a slowdown in price moves have lowered options premiums on aggregate. Such developments suggest that the extreme price moves we have grown accustomed to as of late will die down through short-term trading—especially as the shorter-dated implieds are trading 55 basis points below their longer-term counterparts. What this tells us is that markets are expecting volatility to be lower in the coming week than in the month as a whole.
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
Implied volatilities on EURUSD options have fallen significantly off of their multi-month peaks, as a general recovery in risk appetite and a slowdown in price moves have lowered options premiums on aggregate. Such developments suggest that the extreme price moves we have grown accustomed to as of late will die down through short-term trading—especially as the shorter-dated implieds are trading 55 basis points below their longer-term counterparts. What this tells us is that markets are expecting volatility to be lower in the coming week than in the month as a whole.
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