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Euro Futures Volatility Forecast (24/07/2011)

Euro futures, like most of the other currencies, heavily appreciated against the US dollar throughout the past 5 trading days. In fact, the market opened at 1.4084 on Monday, moved to 1.4116 on Tuesday, rose to 1.419 on Wednesday, jumped to 1.4376 on Thursday and closed at 1.4339 on Friday.

The actual volatility is 0.28% (4.4% in annual terms) and, even in this case, the TGARCH plot is manifestly displaying an out of order situation where the volatility curve is way too low and almost next to touch 0.

It is evident that such a situation is not sustainable in the long run and that is precisely why the upcoming days are likely to see an augment of market variance with a consequent recovery of the US dollar over the Single currency.

Historically, this is the 4th attempt in 2 years to break through the 1.50 area. The first time was in May-June 2011 and even if the price fluctuated within the 1.49 – 1.50 ranges for a while the bears managed to push the price back down again. The second time happened in June 2011but in that case the 1.47 level was never surpassed and the third time was at the beginning of this month when the price hit 1.4535 – 1.4540 and then collapsed. Now we are “witnessing” the fourth attempt, even if the 1.44 threshold proved to be quite solid, and the price action already seems showing some evidence of weakness.

Furthermore, the recovery of the US dollar over the next trading days seems to be a quite likely scenario not just for the Euro but also for the Japanese Yen, British Pound and Swiss Franc.

The HyperVolatility team is bearish Euro futures because the volatility will almost certainly rise over the next trading hours causing a plummet of futures prices which are likely to retest the 1.400 – 1.4050 area by the next Friday.

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