British Pound Futures Volatility Forecast (21/06/2011)

The last week we were bearish British Pound futures and our analysis proved very profitable and accurate once again. In fact, the market opened at 163.2 dropped to 161.6 on Wednesday, kept decreasing on Thursday whose closing price was 161.2 and it recovered on Friday since 161.6 the last price print.

The volatility is now 0.44% (6.9% in annual terms) and the plot is displaying a curve right in the middle of a mean reverting process which is going to end once the variance reaches the 0.50% level (7.9% annualised).

However, the big drop in the conditional variance that accompanied the plunge in futures prices is an extremely suspicious event because the volatility touched 0.26% (4.1% annualised) which constitutes the lowest point ever achieved in 5 months. Specifically, the net decrease in the oscillation rate during a down move of the price action can only mean that many investors did not get rid of their long positions and that the market move we just saw has to be confined to a short term horizon.

The HyperVolatility team is bullish British Pound futures because the symmetry between the fluctuation rate and the price should end soon and this should favour a recovery of the price which is likely to retest the 164 threshold by the end of the week.

On the other hand, the mean reverting process could cause a bit of instability and short term retracement throughout the week but there should not be any serious drop because the US dollar should keep depreciating against the Pound sterling.

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