27 Feb 2015
Markets underestimating the risk of imminent higher volatility in EUR/USD – SG
FXStreet (Barcelona) - The Societe Generale Team comments that the return of low vol regime is unlikely, and further cautions that markets are underestimating the risk of an imminent higher volatility in EUR/USD.
Key Quotes
“The US dollar uptrend has been stalling since one month. As dollar strength has been the number one factor behind the revival in FX volatility, it is not surprising that vols are being pressured when the greenback is pausing.”
“It is alright to observe front-end vols coming off when the short-term realised volatility becomes lower. But in the process, the EUR/USD curve became particularly flat (only 0.6 between 1M and 1Y implied vols), which is a situation that we expect to be only temporary."
“Traditionally, the curve gets steeper when volatility is falling, because the vol market discounts a term premium for longer tenors. The vol curve is returning below 10 again, which is the lower bound of the prevailing medium vol regime.”
“A return of the low vol regime is very unlikely whereas the ECB will start its bond purchases next month, and critically, the market is getting excited again by the schedule of the Fed exit. As a clear sign of the latter factor, the volatility of USD short rates is not abating, in sharp contrast to EUR/USD volatility.”
“We view the recent relief in EUR/USD vega as an excessive move, suggesting that the market is complacently underestimating the risk of imminent higher volatility.”
Key Quotes
“The US dollar uptrend has been stalling since one month. As dollar strength has been the number one factor behind the revival in FX volatility, it is not surprising that vols are being pressured when the greenback is pausing.”
“It is alright to observe front-end vols coming off when the short-term realised volatility becomes lower. But in the process, the EUR/USD curve became particularly flat (only 0.6 between 1M and 1Y implied vols), which is a situation that we expect to be only temporary."
“Traditionally, the curve gets steeper when volatility is falling, because the vol market discounts a term premium for longer tenors. The vol curve is returning below 10 again, which is the lower bound of the prevailing medium vol regime.”
“A return of the low vol regime is very unlikely whereas the ECB will start its bond purchases next month, and critically, the market is getting excited again by the schedule of the Fed exit. As a clear sign of the latter factor, the volatility of USD short rates is not abating, in sharp contrast to EUR/USD volatility.”
“We view the recent relief in EUR/USD vega as an excessive move, suggesting that the market is complacently underestimating the risk of imminent higher volatility.”