Categories

Archives

HyperVolatility – End of the Year Report 2013

The HyperVolatility End of the Year Report 2013 has been completed.

The report has an interactive Table of Contents, therefore, you can simply click on the asset class you are interested in and jump straight to the analysis.

The first copy is read–only while the second file is a printer–friendly version of the research.

The HyperVolatility End of the Year Report 2013 can be downloaded FOR FREE at the following link (no registration required):

HyperVolatility End of the Year Report 2013

HyperVolatility End of the Year Report 2013 (PRINT)

The 1st part of the report examines the performances of the most important asset classes in the world (equities, currencies, bonds and commodities) in 2013.

The asset classes that have been object of our annual research are the following

Equity futures: DAX, E–Mini S&P500, FTSE/MIB

Treasury Bonds futures: German Bund, American Treasury Bonds

Currency futures: Euro, Japanese Yen

Commodity futures: WTI Crude Oil, Gold

Volatility Indices: VIX  

The 2nd part, instead, presents the macroeconomic scenario in USA, Europe and BRICS economies (Brazil, Russia, India, China and South Africa). The analysis focuses on important indicators such as GDP growth, inflation, Debt–to–GDP ratio, unemployment rate, inflation rate and credit rating.

A Chinese and an Italian version of the aforementioned research will be uploaded in the upcoming hours.

Commodities and Currencies: Inter-Market Analysis

Commodity markets are becoming increasingly important in today’s financial scenario. Many investors, traders and fund managers are now shifting their attention towards asset classes such as Crude Oil, Natural Gas, Gold, Silver, Wheat, Coffee or Sugar. Furthermore, the credit crunch brought a great deal of market instability and many equity indices, as well as single stocks, have been abandoned by or lost their appeal to many market players. There are several liquid commodities in the world but the present research will concentrate on, arguably, the heaviest in terms of volume: WTI Crude Oil, Gold and Henry Hub Natural Gas. It is important to point out that the European oil benchmark, the Brent Crude, has been deliberately omitted from the aforementioned list, although very liquid, but it will be the focus of another research. This research will present the results of an inter–market analysis where we compare and contrast the performances of above mentioned 3 commodities against a basket of currencies. The currency exchanges that have been selected are either very liquid (Euro, Japanese Yen, British Pound, Swiss Franc) or related to countries whose trade balances heavily rely on commodities and this is the case for South Africa, Canada, Australia and New Zealand (some market players can also refer to these exchanges as commodity currencies). The research has been conducted using a database consisting of daily data ranging from October 2011 until the 25th of June 2013. Consequently, our study aims to capture the medium–to–long term relationship that WTI Crude Oil, Gold and Henry Hub Natural Gas futures have with those exchanges. The first commodity that will be examined is the WTI Crude Oil:

WTI Crude

The American crude oil chart shows a very strong relationship with Euro, Swiss Franc and South African Rand. However, the correlation is strong and positive for Swiss Franc (+0.36) and Euro (+0.34) but it is negative for the South African currency (-0.34). The positive connection with the Euro is a consequence of the fact that the Single currency is responsible for the 56.7% of US Dollar Index fluctuations. The Swiss Franc, being a European currency, shows a robust positive correlation to the WTI (+0.36), however, the chart signals that the Swiss Franc is not a good hedging tool for the American oil market. Usually, the Swiss currency is adopted by many portfolio managers and market players as a hedge against volatile periods in risky assets but, when it comes to WTI oil, this is not the case. The negative correlation with the South African Rand (-0.34) is given by the fact that South Africa is the second largest oil refiner in Africa. Nevertheless, almost all the oil that is imported belongs to OPEC countries. Consequently, the Rand is more linked to the price of oils extracted from OPEC countries than to the American West Texas Intermediate. Finally, if we exclude a “mild correlation” with the Australian and Canadian Dollars, the remaining exchanges (Yens, British Pounds and New Zealand Dollars) do not show a great sensitivity to WTI price changes. The next market under examination will be Gold:

Gold

The gold market has very good positive connections with many asset classes. If we exclude New Zealand Dollars (+0.07), the Euro (+0.20) and the South African Rand (-0.65), gold futures are strongly bounded to many exchanges. The strong positive correlation to Australian Dollars (+0.62) is obvious because Australia is one of the largest gold exporters in the world while the +0.69 rapport with the Japanese Yen is a signal that many market players started to use again gold as a hedging tool for their portfolios. Furthermore, Canada (+0.57) has large gold mines while the UK (+0.63) is a strong importer and it primarily purchases gold for luxury goods or investment purposes. Once again the South African Rand is a standalone market because its strong negative correlation to gold futures (-0.65) is not just due to portfolio hedging but also to strong fundamental reasons. Specifically, the South African mining industry has been subject to many strikes in the last 3 – 4 years that greatly influenced its extraction rate. Consequently, the SA gold’s output precipitously fell and this could have caused a major loss of “sensitivity” between gold prices and the local currency. The next commodity market is the Henry Hub Natural Gas:

Henry Hub Natural Gas

The Henry Hub is the core distribution point in the natural gas pipeline scheme located in Louisiana, USA. Natural gas futures traded on the NYMEX have been named after it because of the great logistic importance of this area. The above reported chart shows an unstable negative correlation to Australian, Canadian Dollars and British Pounds (-0.22, -0.30 and -0.33 respectively), a rather weak but positive link to New Zealand Dollars and Euros and no correlation at all to Swiss Franc futures(-0.03). On the other hand, there are two currencies that are strongly correlated to natural gas prices: Japanese Yen and the South African Rand. The reasons Japanese Yens have a robust negative relationship (-0.57) to the Henry Hub is that the Asian country has recently doubled its nat–gas consumption but the local demand is almost entirely satisfied via imports (circa 4,500 billion cubic feet). Furthermore, the Japanese Yen is often considered to be a “safe haven” type of investment, hence, many market players will tend to buy the Asian currency when risky assets plummet. The negative relationship between Yens and nat–gas prices is an evident sign that many portfolio managers tend to hedge their natural gas positions with the Japanese Yen. Conversely, the great explosion in natural gas consumption in South Africa (over 160 billion cubic feet in 2011 against 58.2 billions in 2000) and the low import levels make the South African currency rather “susceptible” to oscillations in natural gas prices.

Let’s summarize the main findings in a few bullet points:

WTI CRUDE OIL

1) The correlation is strong and positive with Swiss Franc (+0.36) and Euro (+0.34) but it is negative for the South African currency (-0.34)

2) South Africa is the second largest oil refiner in Africa but almost all the in–flowing oil is imported from OPEC countries. This explains the negative correlation (-0.34) with the Rand

GOLD

1) Australia is one of the largest gold exporters in the world, hence, Australian Dollars are strongly connected to this commodity (+0.62)

2) The +0.69 rapport with the Japanese Yen implies that gold is still considered to be a hedging tool for portfolio risk

3) Canadian Dollars are positively correlated to gold (+0.57) because Canada has large gold mines

4) There is a positive and robust link between gold and British Pounds (+0.63) because UK is a strong importer and Great Britain buys gold for luxury goods or investment purposes

5) The South African gold’s output plunged in recent years due to several strikes in the mining industry. Hence, the drop in the SA gold extraction rate could have caused the negative connection between gold prices and the local currency (-0.65)

HENRY HUB NATURAL GAS

1) There is a robust negative relationship with Japanese Yens (-0.57) because Japan increased its natural gas consumption but it imports almost all the natural gas needed (circa 4,500 billion cubic feet)

2) Negative correlation with the Japanese Yen (-0.57) implies that natural gas portfolios tends to be hedged with the Asian currency

3) The large increase in natural gas consumption in South Africa (over 160 billion cubic feet in 2011 against 58.2 billions in 2000) and a strong local production strengthened the link between the South African currency and natural gas prices (+0.73)

All traders and investors interested in trading commodities and in particular Crude Oil and Gold are strongly advised to read the following HyperVolatility researches:

Commodity Volatility Indices: OVX and GVZ

“The Pricing of Commodity Options”

“Gold Market Performance in 2012”

“The Oil Arbitrage: Brent vs WTI”

“Trading Gold and Silver: A Realized Volatility Approach”

The HyperVolatility Forecast Service enables you to receive statistical analysis and projections for 3 asset classes of your choice on a weekly basis. Every member can select up to 3 markets from the following list: E-Mini S&P500 futures, WTI Crude Oil futures, Euro futures, VIX Index, Gold futures, DAX futures, Treasury Bond futures, German Bund futures, Japanese Yen futures and FTSE/MIB futures.

Send us an email at info@hypervolatility.com with the list of the 3 asset classes you would like to receive the projections for and we will guarantee you a 14 day trial.

The US Dollar Index

The Dollar Index is a very useful yet simple to understand tool for currency, commodity and equity traders. The index measures the fluctuations of the US Dollar against a basket of different currencies: Euro, Japanese Yen, Canadian Dollar, British Pound, Swedish Krona and Swiss Franc (the Forecast Service provides market projections for currencies and many other asset classes. Send an email to info@hypervolatility.com and get a free 14 days trial). In practical terms, the Dollar Index tries to quantify how much the US dollar is appreciating or depreciating with respect to some of the most important and traded currencies in the world. The reason the Dollar Index is a valuable instrument for many traders is primarily due to its correlation to other asset classes and particularly risky assets.

As previously mentioned, the Index tracks the performance of the American dollar against a basket of other currencies, however, each exchange rate has a different weight. Specifically, the Index is a weighted geometric mean whose components and respective weights are the following: Euro (56.7%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%). The Index has 100 as a benchmark value therefore every reading below this threshold would imply a depreciation of the American currency against the basket, primarily the Euro, while any value above it is obviously indicating an appreciation. It goes without saying that the reason the Dollar Index has been trading below the 100 level for so long is the axiomatic consequence of the strength of the Single currency. It is clear that the Euro, whose weight in the Dollar Index calculation is 56.7%, is the most important currency since its impact is by far the heaviest. Obviously, every appreciation of the Single currency will impact negatively on the performance of the dollar and the next chart evidently displays such relationship:

Dollar Index

The above reported chart evidently displays the natural inverse relationship between the 2 markets and the obvious contrary fluctuations can be used to hedge potential currency based portfolios. In particular, the Euro, which is considered to be a risky asset, is positively correlated to equity indices therefore a drop in the Single currency would automatically correspond to a rise in the Dollar index. However, the positive correlation amongst Euro futures and other equity indices (such as E-Mini S&P500, DAX or Nasdaq futures) would suggest that a down trend in the Single currency is likely to be accompanied by a retracement in many risky assets. Therefore, the Dollar Index, being a “contrarian market by default”, could be very useful to detect market nervousness and cover unstable positions in equities. In order to better understand how much the American currency is linked to its components we will analyze the volatility fluctuations of the most important exchanges: Euro, British Pound and Japanese Yen futures. The reason we chose these 3 currencies is related to their weights, in fact, the combination of the aforementioned asset classes is responsible for 82.2% of the Dollar Index’s oscillation (Euro 56.7% + Japanese Yen 13.6% + British Pound 11.9%).

Dollar Index

The calculation tracks the volatility performance of the Dollar Index, Euro futures, Japanese Yen futures and British Pound futures. It is evident that the oscillations are more or less correlated, in fact, the volatility decreased for all asset classes in January, April – May, August – September and November – December but drastically augmented in February, June – July and October. Undoubtedly, every market behaved differently in the short term but the macro movements are very correlated each other. This information is very important to forex traders because it proves that the Dollar Index, in terms of magnitude, moves as much as the other currencies implying that it could be used as a hedging tool when the Euro or the British Pound are in downtrend (the behaviour of the Japanese Yen is different and it will be treated separately later on). Let’s have a look at the relationships amongst the aforementioned exchanges from a quantitative point of view:

Dollar Index

The table presents the correlation and covariance of each asset class against the Dollar Index and the results stress what have been previously stated: the Index obviously has an extremely strong negative correlation to the price of the Euro (-0.93) and a strong negative correlation to the price of the British Pound (-0.66). However, Euro and British Pound volatilities display a strong positive connection to the Dollar Index, in fact, the correlation coefficients are +0.79 and +0.69 respectively. The positive connection in volatility is an obvious consequence of the fact that the rise in the Dollar Index will always be proportioned to the depreciation of the remaining currencies, hence, the movement will be fairly similar in terms of magnitude. The covariance of Euro and British Pound prices with respect to the value of the dollar (the covariance measures the mutual variability of 2 random variables) is negative, -0.16 and -5.04 respectively, which is another natural consequence of the appreciation of the American currency against European exchanges. On the other hand, the volatility covariance is positive, 1.95 and 1.73 respectively, implying that Euro and British Pound volatilities rise when the volatility of the Dollar Index rises and vice versa. The reason volatilities move in the same direction is because both markets observe a leverage effect process: the volatility tends to rise when the price action is in downtrend. Specifically, a drop in Euro and British Pound futures would probably cause an increase in market volatility but a rise in the Dollar Index would increase its volatility too. In other words, risky assets such as Euro or British Pound futures follow a leverage effect process while the Dollar Index is governed by an inverted leverage effect: the volatility increases with a larger buying pressure and decreases in case of a sell–off. Consequently, If Euro and British Pound futures are plunging they are effectively depreciating against the Dollar. Therefore, the volatilities of the 2 European asset classes, following a leverage effect process, will increase while the appreciation of the Dollar will push the Dollar Index up and the buying pressure would increase its variance too.

The Japanese Yen, instead, needs a different approach. First of all, it is necessary to remind that the Asian currency is often used as a hedging tool in portfolio management because many market participants rush to buy Yen when equities drop. Secondly, it is important to point out that the “safe haven role” played by the Japanese Yen has a clear implication: the volatility rises when the market heads north (if you are interested in hedging portfolio risk you may want to read the HyperVolatility research entitled “Portfolio Hedging: Risky Assets vs Safe Havens”). As we can see, Japanese Yen futures, as well as the Dollar Index, are popular assets when equity indices and single stocks are plummeting and their volatilities are both driven by an inverted leverage effect process. The positive price correlation between Dollar Index and Japanese Yen futures (+0.10) and the weak covariance (-0.26) evidently proves the point just made. The price correlation is clearly very low and the negative, although feeble, covariance indicates that the buying pressure was sometimes stronger for the Asian currency. The numbers suggest that in 2012 the Dollar Index and Japanese Yen futures have been both used as a hedging tool but in a diverse fashion because the buying pressure was evidently different.

Conclusions

The Dollar Index is a very simple to understand tool for traders and it is worth monitoring when investing. Here are some important points to bear in mind:

1) The benchmark value for the Dollar Index is 100. If the Index is below this level the dollar is depreciating against other currencies while a reading above this threshold implies an appreciation of the American currency

2) The Dollar Index is a weighted geometric mean whose components and respective weights are the following: Euro (56.7%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%)

3) The Euro is the currency that influences Dollar Index’s fluctuations the most

4) The volatility of the Dollar Index rises with an increasing buying pressure and decreases when the market goes down

5) Euro, Japanese Yen and British Pound are responsible for the 82.2% oscillations in the Dollar Index

6) The Dollar Index can be effectively used to hedge positions in Euro and British Pound futures

7) Japanese Yen futures do not show much correlation to the Dollar Index because of their “safe haven” characteristics

8) The Dollar Index, given its “contrarian nature” is a rather good asset to hold when risky assets (equities, stocks, etc) plunge

The HyperVolatility Forecast Service enables you to receive the statistical analysis and projections for 3 asset classes of your choice on a weekly basis. Every member can select up to 3 markets from the following list: E-Mini S&P500 futures, WTI Crude Oil futures, Euro futures, VIX Index, Gold futures, DAX futures, Treasury Bond futures, German Bund futures, Japanese Yen futures and FTSE/MIB futures.

Send us an email at info@hypervolatility.com with the list of the 3 asset classes you would like to receive the projections for and we will guarantee you a 14 day trial.

Euro Futures Volatility Forecast (05/10/2011)

Euro futures opened at 1.3509 on Monday, achieved 1.358 on Tuesday, dropped to 1.3552 on Wednesday, retested the 1.3576 area on Thursday and plunged to 1.3388 on Friday.

The current volatility is 0.76% (12% annualised) and the TGARCH plot is evidently displaying a fairly stable curve which should probably remain around this level in the upcoming hours.

The great uncertainty surrounding the Euro zone could keep the selling pressure pretty high but the fact that the fluctuations rate is still trading in a fairly “normal” range seems suggesting that the short term trend could change.

Clearly, most of the movements will be influenced by what politicians are going to say/do in order to ring fence a potential Greek sovereign debt default  implying that a great deal of attention to public speeches will be needed.

The HyperVolatility team is moderately bullish Euro futures because the stable outlook of the volatility curve should support the price action which could eventually retest the 1. 3500 area by Friday.

Swiss Franc Futures Volatility Forecast (05/10/2011)

Swiss Franc futures opened at 111.06 on Monday, touched 111.64 on Tuesday, settled to 111.48 on Wednesday, remained around 111.55 on Thursday and sharply dropped to 110.47 on Friday.

The actual volatility is 0.74% (11.7% in annaul terms) and the TGARCH plot is now showing an extremely flat curve which would probably remain around this level over the next trading days. However, the great steadiness of the curve and the extended bear movement of the volatility could easily lead to short term bursts of the fluctuations rate and consequently to an augment of the buying pressure.

The HyperVolatility team is moderately bullish Swiss Franc futures because it is likely that the oscillation rate will augment over the next trading hours pushing the price action towards the 111.8 – 112 area before Friday.

Nonetheless, extra care should be taken when trading this market because the Swiss authorities are closely monitoring the exchange rate in order to prevent an ulterior sharp appreciation from happening.

British Pound Futures Volatility Forecast (05/10/2011)

British Pound futures opened at 155.4 on Monday, jumped to 156.3 on Tuesday, retraced to 155.8 on Wednesday, settled at 156 on Thursday and closed at 155.7 on Friday.

The actual volatility is 0.53% (8.4% annualised) and the TGARCH plot is showing an upward sloping curve which is trying to complete its mean reverting process towards the long term equilibrium point which is stable around the 0.55% level (8.7% in annual terms).

However, the spread between the current level and the balance threshold is not that striking and consequently there should not be violent moves to be expected over the next trading hours.

The HyperVolatility is slightly bearish British Pound futures because the increase in the conditional variance should push the price action toward the 152.8 – 153 level before Friday.

Nevertheless, further bad macroeconomics news could easily drag futures prices even more down because investors would rush to buy US dollars whose value would irremediably appreciate against all other European countries. Should the last scenario occurs we would see British Pound futures retest the 150 support.

Japanese Yen Futures Volatility Forecast (05/10/2011)

Japanese Yen opened at 130.9 on Monday, touched 130.1 on Tuesday, achieved 130.8 on Wednesday, plunged to 130.3 on Thursday and settled at 129.7 on Friday.

The actual volatility is 0.53% (8.4% annualised) and the TGARCH plot is now displaying a fairly stable volatility curve which is likely to remain at this level even in the upcoming trading days.

However, a short term burst of the conditional variance could very easily occur and that would imply an increase in the buying pressure which would probably push higher the price action.

The HyperVolatility team is neither bullish nor bearish Japanese Yen futures because the volatility should remain at current levels even though some oscillations are highly probable.

The price action should remain around the 130.6 -130.8 level throughout the entire week but a worst than expected news could easily change the scenario and push Japanese Yen futures towards the 131 threshold.

Euro Futures Volatility Forecast (27/09/2011)

Euro Futures opened at 1.36 on Monday, remained unchanged on Tuesday, plummeted to 1.35 on Wednesday, plunged to 1.346 on Thursday and closed at 1.35 on Friday.

The volatility is now 0.8% (12.6% annualised) and the TGARCH curve is neither upward nor downward sloping even if the very last part of the plot seems suggesting a shy increase in the conditional variance. However, the fluctuations rate is now very far from its medium term equilibrium point which ranges between the 0.73% – 0.77% area (11.5% – 12.2% in annual terms).

The first half of the week could see the Single currency to depreciate against the US dollar because the oscillation rate is still looking at the northern part of the chart but it is likely that the rumours about the 2 -3 trillion euro package to save Europe from financial catastrophe will provoke some speculative buying.

European leaders are now calling for a more concrete action to bail out Greece (later is better than never) and to prevent the crises from spreading to too-large-to-be-saved countries (read Italy and Spain): we will see if facts will follow words because the latter are cheap but the former are not!!!

The HyperVolatility team is moderately bullish Euro futures, even if the first half of the week could see another downside move, and the conditional variance should soft over the next trading hours whilst the price action should eventually retest the 1.3600 – 1.3700 area by Friday.

Needless to say that an ulterior macroeconomics shocks would irremediably drag futures prices down as more and more investors will rush to buy US dollars.

 

Swiss Franc Futures Volatility Forecast (27/09/2011)

Swiss Franc futures opened at 112.8 on Monday and remained stable at this level on Tuesday but on Wednesday the price hit 111.4 whilst it plummeted to 110.4 on Thursday and settled at 110.7 on Friday.

The actual volatility is 1% (15.8% in annual terms) and the TGARCH curve is still showing a persistent lateral movement which is probably going to last in the upcoming days because the heavy intervention of the Swiss Central bank  scared away many investors who were,instead, seeking protection.

Swiss Franc futures is now an almost dead market. The intervention of the Swiss monetary authorities poised the price action and the massive drop in volatility is simply the natural consequence of the aforementioned equilibrium distortion.

The HyperVolatility team is slightly bullish Swiss Franc futures because the low volatility environment should support the price action which could potentially retest the 112 -113 threshold by Friday. However, any large move on the upside will be heavily arbitraged away from the Swiss Bank giving a great arbitrage opportunity to traders who will look to short Swiss Franc futures should they move too further away.

Overall, the week should see a large lateral movement of the price action with very short term movements,potentially  on the upside, that are not going to distort the price action that much.

British Pound Futures Volatility Forecast (27/09/2011)

British Pound Futures opened at 156.6 on Monday and settled at the same price on Tuesday, dropped to 154.9 on Wednesday, touched 153.4 on Thursday and settled at 154.7 on Friday.

The current volatility is 0.57% (9% in annual terms) and the volatility curve is evidently displaying an upward sloping trend which is a natural consequence of the large plunge the price action experienced over the last week. On the other hand, the conditional variance has now touched its 5 months high and an ulterior explosion of the fluctuations rate should be considered very carefully.

The large retracement in the market was caused by a sharp appreciation of the dollar which has been, in turn, provoked by the sell-off that hit financials the last week.

The HyperVolatility team is moderately bullish British Pound futures because the conditional variance will probably tend to soften over the next trading days supporting the price action which is likely to retest the 156 – 157 area by Friday.

Needless to say that the US dollar remains one of the few safe havens left and therefore a worsening of the European sovereign debt crises would push more and more traders to long the greenbacks and short Her Majesty’s currency: another delicate week ahead!!

Go back to top