Swiss Franc Futures Volatility Forecast (15/05/2011)

The market unexpectedly dropped although the previous week’s volatility chart seemed to highlight a clear signal of recovery. Particularly, the drop in volatility we were expecting the last week did not cause the market to rally but conversely it pushed that down. Mainly, the market opened at 114.6 dropped to 112.7 on Wednesday and collapsed to 111.9 on Friday.

The volatility is now around 0.63% (9.9% annualised) but the TGARCH curve is clearly downward sloping although the market has been plummeting quite consistently for 5 consecutive days. On the other hand, the conditional variance is trading within the usual boundaries and the current level is extremely close to its long term equilibrium point. How this should be interpreted?

Clearly, the appreciation of the US dollar influenced quite substantially the Swiss currency because many investors and trader started to short Swiss francs and long dollars but is the trend going to continue?

The HyperVolatility team is bearish on this market because the symmetric effect of volatility is a suspicious signal. In particular, the volatility should plummet in the first 2 days of the week eventually bottoming around 0.6% (9.5% in annual terms) whilst the price should move sideways.

However, the overall week should be a negative one because the TGARCH curve is likely to head north once again whilst the price is probably going to retest the 110.5 – 111 area by the next Friday.

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