Euro Futures Volatility Forecast (02/05/2011)

Euro futures kept increasing although the evident weakness of the market. In fact, the price opened at 1.462 on Monday, rose to 1.4767 and then closed to 1.4789 on Friday.

The actual volatility is around 0.43% (6.8% annualised) and the TGARCH plot is displaying a quite unstable situation since the volatility curve is still moving within a very narrow range and its current measurement is clearly very low.

Furthermore, the very last part of the chart shows a slight sign of augment of the conditional variance meaning that more volatility should be expected in the upcoming days and that the up move experienced by this market is now showing some sign of weakness.

Moreover, the great rally which brought Euro futures in this area is about to end soon because the sharp depreciation of the US dollar, which pushed the exchange rate to 1.4789, has been going on for more than 2 months and a further appreciation of the European currency against the American Dollar is an unwanted side effect that the ECB will try to avoid.

Specifically, the steady up move has been caused by the higher interest rate that the ECB offers over the Fed and this caused a lot of speculative movements of investors and traders who went long euro and short dollar.

The HyperVolatility team remains bearish on this market because the volatility is way too low and there will soon be a mean reverting move which will bring the curve back into the 0.55% area (8.7% in annual terms) whilst prices should plummet and touch 1.4550 by the end of the week.

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