Euro Drops to 1 Month Lows, Forex Volatility Charts
If you have been watching the recent movements in G10 currencies, it should be no surprise that option volatilities have sunk to new lows. For the past week and a half, most of the major currency pairs have been trapped in narrow ranges and in the case of the EUR/USD volatility is near a 6 year low. This means EUR/USD is prime for a breakout and we are already beginning to see volatility increase this morning. As shown in the following chart the euro’s decline was caused by the turnaround in U.S. equities but even as stocks opened higher, it held onto its losses. Ongoing protests in the Ukraine and a sell-off in emerging market currencies is adding pressure on the euro. With no major Eurozone or U.S. economic reports scheduled for release today, the outlook for the EUR/USD hinges entirely on risk appetite. The surprise increase in U.S. new home sales could lend support to equities. Economists were looking for sales to decline by 3.4% but instead they jumped 9.6% in January.
The following chart shows how much EUR/USD 1 month volatility has declined in recent weeks. Tomorrow’s German unemployment report could trigger a move in the currency but we may have to wait for the ECB rate decision for a more meaningful breakout.
USD/JPY and GBP/USD volatility have also fallen but are not to significant levels, which suggests that their consolidation could continue. This is consistent with our view that USD/JPY may not break out of its range until next Friday’s non-farm payrolls report. Janet Yellen testifies on monetary policy tomorrow but we are not looking for any new comments because like many of her peers, she wants to see how the labor market fared in February.