Euro Futures Volatility Forecast (08/08/2011)

The Single currency moved almost like the Pound and, even in this case, it is worth mentioning that such random oscillations of the price are just a consequence of the huge concerns about the US economy. In fact, Euro futures opened at 1.4231 on Monday, dropped to 1.4186 on Tuesday, jumped to 1.4301 on Wednesday, dropped to 1.4082 on Thursday and closed at 1.4277 on Friday.

The current volatility is 0.71% (11.1% in annual terms) and the TGARCH plot is clearly showing a volatility curve which is slightly upward sloping although it seems it has reached its medium term equilibrium point which is set to be around the 0.7% level (11.1% annualised).

The big drop of the S&P500 and the US debt downgrading will probably add pressure to the price action and increase the volatility in the short term. As mentioned for other analysis many investors will try to protect their portfolios and therefore large amount of capitals could flow from the equity indices towards the US dollar causing an appreciation of the greenback.

The problem is that many investors are now deciding between the least painful choices: US debt downgrading or Europe instability crises?

The HyperVolatility team is bearish Euro futures because the conditional variance should now head north provoking an appreciation of the greenback against the Single currency. Hence, Euro futures are likely to retest the 1.395 – 1.4000 area by Friday.

The situation in Europe is pretty bad with Spanish and Italian yields very close to the 7% warning zone. The ECB announced it would buy Spanish and Italian sovereign debt securities directly from the secondary markets but we do not think that such an intervention will be enough to cool down this hot summer.

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