special reports

Euro, Pound Looking For Breakouts, Yen Volatility Curbs Projections

Wednesday, 27 June 2007 23:36:44 GMT  |  John Kicklighter, Currency Analyst

Currency   Spot Price   Barometer Reading
EURUSD     1.3436         Breakout
GBPUSD     1.9961         Breakout
USDJPY      122.56         Range
USDCAD    1.0717         Breakout
AUDUSD    0.8378         Range

Implied volatility is one of the most tried and true methods for objectively measuring expected volatility in the spot market.  Derived from currency options with different maturities, implied volatilities are used to help predict potential movements in the spot market and is one of the most popular strategies of systems traders and other professional hedge funds.

At its most fundamental, the basic and intuitive interpretation of this implied data is often the most telling for traders.  Taken alone, a steady rise in the longer-term implied volatility (the red line) is indicative of a strengthening trend; while inversely, a decline often reveals that a period of range or consolidation in spot is ahead or already in place.  Additionally, the histogram or spread between the shorter and longer-term implied volatilities (the blue colored bars) tells a different perspective. As the histogram rises, volatility is expected to pick up faster in the near future relative to the longer-term range.  Ultimately, this increases the probability of a breakout scenario in the underlying currency. 

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