The euro has been trading in the 1.0500/1.1000 range for almost exactly a year now. Although there have been years with lower volatility, for example in the pre-Covid period, the current sluggish market is something special. This is of course due in particular to the two central banks, the Fed and the ECB, which, together with the BoE, have simultaneously raised key interest rates in unison without making any major changes to the relative conditions.
This synchronisation of key interest rates has of course once again put a damper on implied volatilities, which have now apparently settled at mid-6% levels for several months. This does not make it any easier for active players, but the rest of the investors are obviously quite satisfied with the market result.1
The lower table shows quotes of EURUSD impl vols at 06:20 NY time:
And as usual, here is the comparison with the ATM impl vols at the last observation date:
A small increase in EURUSD ATM vols can be observed across the entire maturity range, albeit only gradually. I interpret this as the first sign that the market is expecting a little more movement in the medium term (hopefully!). What could be somewhat more interesting here is that the risk reversals have shifted slightly towards the calls for the low delta options. After all, the euro is trading around three-quarters of a point lower compared to the last Market update #20, which should usually lead to more expensive puts.
The next FED interest rate meeting will take place next Wednesday. This is also reflected in the break in the otherwise typically positive term structure of the volatility surface. The 1w and 2w maturities are more expensive than the 3m and above, especially for calls. The market therefore sees the risk also on the upside in the short term. And indeed, a sustained break of the important 1.1000 treshold could change the medium-term picture quickly.
Overall, I think the current level of impl Vols is too low. In this respect, I see good opportunities for active protagonists to profit from rising volatility in the short to medium term with the tenors 3m and 6m (straddles or hedged calls or puts). Players with a real need for hedging should keep a close eye on the slightly changed skew. Dollar buyers can possibly expect higher spot levels in the near future if the changed parameters in the options market are confirmed next week. Ultimately, it depends heavily on the FED's dot plan and whether inflation in the dollar zone develops differently from that in the euro zone. However, another positive correlation cannot be ruled out here either.2
Good luck,
Sebbo
It appears that the price range is currently hitting the sweet spot for European importers and American exporters. This is presumably also benefiting the central banks, which prefer to focus on bond yields in view of rising debt ratios.
reminder: my content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances.