Despite global turmoil, implied EUR/USD volatility at all-time low.
If you haven’t noticed, the world is in a pretty turbulent state right now—one of the highest, according to geopolitical think-tank Policy Uncertainty, whose gauge places the current global economic uncertainty is at its highest point in 22 years—basically since the gauge was invented back in 1997. To gain a better understanding, just look at the daily headlines: Brexit, ongoing trade wars, ambivalent parliaments and sudden rises in power of populist politicians. The financially-minded are interested in how such times play out on the financial markets, which brings us to an interesting revelation: despite all the turmoil going on around the world, implied EUR/USD volatility is trading at its lowest since the euro was introduced 20 years ago. In fact, certain analysts have claimed info obtained from derivative contracts suggests that EUR/USD—the most traded currency pair on the markets ($400 trillion annually)—could move less than 6% in 2020.*
Trade ranges between the EUR/USD hit the narrowest point in 20 years, coming in at around 20 pips as of 25th November and placing implied volatility trading at 4.27%–the lowest on record, taken from option prices on a 3-month horizon.** What’s more, as of 14th November, the volatility implied by the cost of certain future contracts dropped below the rates of the otherwise tranquil days preceding the 2007 financial crisis. To borrow a phrase from the British, investors are generally keeping calm and carrying on.*
What’s the reason?
Well, there’s no hard and fast answer, but there are two possible explanations. The first is due to the monetary policies on both sides of the EUR/USD coin. In the US, response to global uncertainty saw the Fed tightening its purse strings back in 2013 and raising interest rates in 2015—then making a 180-degree turn by cutting rates for the first time since 2008 this past July. And in September of 2019, the European Central Bank slashed interest rates by half a percent. The end result saw the dollar go up and the euro go down, however now both the euro and the US dollar share a similar direction, which is what’s catching all the attention.*
The other explanation could be that investors don’t see things as all that bad by comparison to such events. Compared to what? Well, try the European sovereign-debt crisis—beginning in 2010—that caused some to fear that the euro would break up and which, by 2012, had even more thinking that there was a 70% chance a euro-zone member would leave as a result. The mere thought of such a collapse sent implied volatility skyrocketing.*
What could happen next?
The first thing some wonder is, will it stay this way? While the uncertainty caused by Brexit, the Hong Kong protests and various trade wars certainly isn’t going anywhere, there is additional reassurance in observing other signs of market progress. For example, talks of a euro break-up aren’t as prevalent or threatening as they once were. Also, the yield for Italy’s ten-year government bonds went from upwards of 7% in 2011 to just about 1%. Yet to quote The Economist, “As in the financial crisis, even when markets seem calm, volatility may come roaring back.”* while some regard this volatility in a positive light, all traders should remain vigilant and gather as much info on their chosen instrument as they can at financial sites like Vestle , where you can access live market rates and a real-time economic calendar, both on the desktop version as well as on-the-go via the Vestle IOS and Android app for mobile.
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