Euro Futures Volatility Forecast (04/07/2011)

Euro futures rallied sharply throughout the entire week despite our bearish view because the Greek parliament approved the austerity package which, in turn, will bring ulterior cash injections in the country via a further bail-out plan sponsored by the European Union and the IMF. Nevertheless, we clearly stated that more macroeconomics news would have kept us away from this market and we closed our positions as soon as we noticed that the panic started to spread in the market.

Euro futures opened at 1.4246, rallied to 1.4334 on Tuesday, broke through the 1.44 threshold on Wednesday and managed to remain in a relatively high area because 1.4472 was the closing price on Thursday whilst 1.45 was Friday’s settlement: the Single currency heavily appreciated against the US dollar.

The actual volatility is 0.64% (10.1% annualised) and the TGARCH curve is obviously going through a period of relative calmness and tranquillity implying that the big appreciation of the Single currency against the greenback was fairly steady.

The HyperVolatility team is moderately bearish on Euro futures but we recon that a sideways movement is going to be the dominant “feature” of the price action in the next hours.

However, should the volatility surpass the 0.7% – 0.71% threshold (11.1% – 11.2% in annual terms) we would enter some shorts because the 1.45 resistance will hardly be broken and many bears will try to take advantage from such an event. Additionally, we think that the great rally is likely to be followed by a short term retracement which would push the price back into the 1.4300 – 1.4350 area but the aforementioned scenario is more likely to happen in the second half of the week.

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