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.
Saturday, May 3, 2008
Carry Trade On The Rise As Volatility Cools, Rate Differentials Improve
Through there is growing concern as to how long high yielding currencies like the New Zealand and Australian dollars can keep their rates at record highs, interest in the carry trade has still improved over the past week. The DailyFX Carry Trade Index rose $296 since last week with help from a modest cooling in currency market volatility and a general improvement in the outlook for the yen crosses.
• Carry Trade On The Rise As Volatility Cools, Rate Differentials Improve
• Fed And BoE Boost Risk Appetite By Widening Their Collateral Nets
• Caution Still In Place As Market Questions High Yielders Buoyancy
Through there is growing concern as to how long high yielding currencies like the New Zealand and Australian dollars can keep their rates at record highs, interest in the carry trade has still improved over the past week. The DailyFX Carry Trade Index rose $296 since last week with help from a modest cooling in currency market volatility and a general improvement in the outlook for the yen crosses.
There has been a tangible rebound in risk appetite over the past few weeks; and the carry trade has been one of the primary benefactors. Considering the thawing in credit markets recently, it seems that the cooperative effort by global central banks to revive liquidity is paying off. In fact, even with conditions improving, the Bank of England and Federal Reserve have upped their efforts to put financial markets on an even keel once and for all. Both the Monetary Policy Committee the Fed announced it they were widening their definitions of acceptable collateral for access their respective liquidity injections. These efforts must be potent indeed considering volatility has cooled and the carry basket has rallied over the past few weeks despite headlines of further writedowns from big banks and warnings from the BoE that falling UK commercial property values may trigger considerable defaults and another wave of massive losses for banks. And, while conditions seem to be improving for the carry trade, the mood is still one of caution. While pairs like USDJPY, USDJPY and GBPJPY have put in for a tentative trend change, the higher-end of the yield curve is actually starting to fall as traders expect the central banks with high benchmark rates will eventually be forced to ease like the Fed, BoE and BoC.
• Carry Trade On The Rise As Volatility Cools, Rate Differentials Improve
• Fed And BoE Boost Risk Appetite By Widening Their Collateral Nets
• Caution Still In Place As Market Questions High Yielders Buoyancy
Through there is growing concern as to how long high yielding currencies like the New Zealand and Australian dollars can keep their rates at record highs, interest in the carry trade has still improved over the past week. The DailyFX Carry Trade Index rose $296 since last week with help from a modest cooling in currency market volatility and a general improvement in the outlook for the yen crosses.
There has been a tangible rebound in risk appetite over the past few weeks; and the carry trade has been one of the primary benefactors. Considering the thawing in credit markets recently, it seems that the cooperative effort by global central banks to revive liquidity is paying off. In fact, even with conditions improving, the Bank of England and Federal Reserve have upped their efforts to put financial markets on an even keel once and for all. Both the Monetary Policy Committee the Fed announced it they were widening their definitions of acceptable collateral for access their respective liquidity injections. These efforts must be potent indeed considering volatility has cooled and the carry basket has rallied over the past few weeks despite headlines of further writedowns from big banks and warnings from the BoE that falling UK commercial property values may trigger considerable defaults and another wave of massive losses for banks. And, while conditions seem to be improving for the carry trade, the mood is still one of caution. While pairs like USDJPY, USDJPY and GBPJPY have put in for a tentative trend change, the higher-end of the yield curve is actually starting to fall as traders expect the central banks with high benchmark rates will eventually be forced to ease like the Fed, BoE and BoC.
Friday, May 2, 2008
Euro Inches Higher As Markets Await Payrolls
Traders squared up their positions ahead of US Non Farm payroll data due to be released at 12:30 GMT today and EURUSD climbed back towards the 1.5500 figure after a day of battering yesterday that saw the unit lose nearly 200 points against the greenback. The buck has been strengthening all week on the assumption that the US economy may not be nearly as weak as analysts had previously thought, but today’s NFP report could prove to be the moment of truth that resolves the argument of whether the US is in the midst of a serious recession or simply in a slowdown.
Our pre NFP analysis Will Non-Farm Payrolls Recover provides inconclusive evidence with 6 leading indicators pointing to further deterioration in the labor market while 3 hint at improvement. The NFPs are notoriously difficult to predict for a host of reasons including the birth/death model which makes monthly adjustments to the number as well as the possibility that public sector hiring may have increased in April and therefore mitigated some of the negative effects of the recent spate of private sectors layoff announcements.
Our best guess is that the number today will likely print better than –100k loss and we base that assumption mainly on the improvement in the four week jobless claims average. Nevertheless, the possibility of a surprise either way appears to be quite strong today and the post news reaction may be typically volatile. Therefore as always we prefer to stand down ahead of the number.
In other economic news Australian Retail Sales printed better than forecast rising 0.5% vs. 0.3% expected indicating that the economy Down Under continues to grow at a healthy pace. If the bulls are indeed correct that the worst of the credit crunch crisis is behind us and global economy will continue to expand at 3% pace or better, Australia becomes the strongest beneficiary of such an outcome piggybacking on China’s voracious growth.
While RBA may have ended its rate hike cycle for now, it is unlikely to begin easing if economic conditions in Australia maintain their current levels. If RBA stands still, the Aussie with its 7.25% yield will remain a magnet for global investment flows and AUDUSD could hit parity if global risk environment remains benign.
Our pre NFP analysis Will Non-Farm Payrolls Recover provides inconclusive evidence with 6 leading indicators pointing to further deterioration in the labor market while 3 hint at improvement. The NFPs are notoriously difficult to predict for a host of reasons including the birth/death model which makes monthly adjustments to the number as well as the possibility that public sector hiring may have increased in April and therefore mitigated some of the negative effects of the recent spate of private sectors layoff announcements.
Our best guess is that the number today will likely print better than –100k loss and we base that assumption mainly on the improvement in the four week jobless claims average. Nevertheless, the possibility of a surprise either way appears to be quite strong today and the post news reaction may be typically volatile. Therefore as always we prefer to stand down ahead of the number.
In other economic news Australian Retail Sales printed better than forecast rising 0.5% vs. 0.3% expected indicating that the economy Down Under continues to grow at a healthy pace. If the bulls are indeed correct that the worst of the credit crunch crisis is behind us and global economy will continue to expand at 3% pace or better, Australia becomes the strongest beneficiary of such an outcome piggybacking on China’s voracious growth.
While RBA may have ended its rate hike cycle for now, it is unlikely to begin easing if economic conditions in Australia maintain their current levels. If RBA stands still, the Aussie with its 7.25% yield will remain a magnet for global investment flows and AUDUSD could hit parity if global risk environment remains benign.
German Retail Sales Fall, Is The Euro Bull Run Over?
Fundamental Headlines
• AUDUSD – Australian retail sales rose 0.5% in February from -0.1% the month prior. Food sales jumped 1.7% from 0.3% in February, on the back of record prices. A robust labor market and wage growth have enabled Australians to absorb the price appreciation. Inflation continues to rise and remains a concern for the RBA, but a global slowdown is expected to keep the MPC from raising rates at next weeks policy meeting. For more news and resources, visit our Australian Dollar Currency Room.
• EURUSD – German retail sales unexpectedly declined for a second month in March, as rising energy and food costs curbed consumer spending. Seasonally adjusted sales fell 0.1% after a 0.7% decline in February. The German labor market remains strong and consumer confidence is up, but if inflation doesn’t abate, shoppers may continue to tighten their wallets. Discuss the topic and your trade ideas in the EUR/USD Forum.
• GBPUSD – The U.K. construction PMI index fell to 46.1 in April from 47.0 the month prior. The sector has started to shrink weighed by the housing slump and tight credit markets. The BoE recently infused £50 billion in liquidity into the market in an attempt to loosen lending standards and promote housing demand. Discuss the topic and your trade ideas in the GBP/USD Forum.
• AUDUSD – Australian retail sales rose 0.5% in February from -0.1% the month prior. Food sales jumped 1.7% from 0.3% in February, on the back of record prices. A robust labor market and wage growth have enabled Australians to absorb the price appreciation. Inflation continues to rise and remains a concern for the RBA, but a global slowdown is expected to keep the MPC from raising rates at next weeks policy meeting. For more news and resources, visit our Australian Dollar Currency Room.
• EURUSD – German retail sales unexpectedly declined for a second month in March, as rising energy and food costs curbed consumer spending. Seasonally adjusted sales fell 0.1% after a 0.7% decline in February. The German labor market remains strong and consumer confidence is up, but if inflation doesn’t abate, shoppers may continue to tighten their wallets. Discuss the topic and your trade ideas in the EUR/USD Forum.
• GBPUSD – The U.K. construction PMI index fell to 46.1 in April from 47.0 the month prior. The sector has started to shrink weighed by the housing slump and tight credit markets. The BoE recently infused £50 billion in liquidity into the market in an attempt to loosen lending standards and promote housing demand. Discuss the topic and your trade ideas in the GBP/USD Forum.
Euro Decline Still Has More to Go
The EURUSD has fallen nearly 600 pips (to the low) from its 1.6018 top. So, is it possible that the pair is entering one of the strongest (and maybe the strongest) portions of its decline since the top? In a word; yes. As long as price remains below 1.5643, the short term structure is bearish and support does not begin until 1.5230.
Thursday, May 1, 2008
FOMC Cuts, Outlook Unclear
The dollar was mixed following the FOMC’s announcement to cut rates by 25-basis points to 2.0%. The Fed reiterated that economic activity remains weak, while “household and business spending has been subdued and labor markets have softened further”. The Fed expects lingering tight credit conditions and the “deepening housing contraction” to weigh on growth over the coming quarters. Nonetheless, the statement did not give a clear indication of whether the Fed would continue easing policy over the coming months. The FOMC said that uncertainty about the inflation outlook remains high, but does expect it to moderate in the coming quarters. While it was unclear from the policy statement, we anticipate the Fed will leave interest rates unchanged for the remainder of the year.
Economic data from the US earlier in the session was better than expected, with the advanced reading of Q1 GDP unchanged at 0.6% -- beating out calls for a drop to 0.2%. The Q1 core PCE prices declined to 2.2% from 2.5%, while GDP sales posted a 0.2% drop versus a 2.4% increase in the previous quarter. The April ADP private sector payrolls number also reported better than forecast, posting a 10k increase, compared with estimates for a 60k decline and improving slightly from 8k in March. The April Chicago PMI survey improved from March, rising to 48.3 from 48.2.
Economic data from the US earlier in the session was better than expected, with the advanced reading of Q1 GDP unchanged at 0.6% -- beating out calls for a drop to 0.2%. The Q1 core PCE prices declined to 2.2% from 2.5%, while GDP sales posted a 0.2% drop versus a 2.4% increase in the previous quarter. The April ADP private sector payrolls number also reported better than forecast, posting a 10k increase, compared with estimates for a 60k decline and improving slightly from 8k in March. The April Chicago PMI survey improved from March, rising to 48.3 from 48.2.
Dollar Mixed Ahead of Fed
The greenback was mixed in the Tuesday session, advancing versus the euro while relinquishing gains against the sterling and the yen. The economic calendar saw the release of the April consumer confidence survey, which declined to 62.3, albeit less than expected, from 64.5 from March.
The major currency pairs will likely trade within range ahead of the FOMC policy decision tomorrow afternoon. We expect the Fed to ease policy by 25-basis points to 2.0% while maintaining a downbeat outlook on the economy similar to its previous statement. Nonetheless, we anticipate the Fed to leave policy unchanged for the remainder of the year after this week’s rate cut given the aggressive easing that has already materialized.
The major currency pairs will likely trade within range ahead of the FOMC policy decision tomorrow afternoon. We expect the Fed to ease policy by 25-basis points to 2.0% while maintaining a downbeat outlook on the economy similar to its previous statement. Nonetheless, we anticipate the Fed to leave policy unchanged for the remainder of the year after this week’s rate cut given the aggressive easing that has already materialized.
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