Aqumin Volatility Newsletter 07/25/2012 - $FXE

Euro Mess

All of the give and take in the current Euro Zone bailout discussions is really putting a damper on the US markets. While we have our own politicians to deal with (not much happening there until mid-November), the never ending crisis in the Euro is becoming a real global drag. England reported shrinking GDP although most of the reason is a reduction in government spending. It is the never ending game of kick the can that hurts global sentiment. I think the Asian governments did a much better job of dealing with the borrowing issues quickly in 1998. These problems will continue to plague our markets until a permanent solution (fiscal compact, that is) is in place.

How to see this? Even on an up day in the Euro (from near term lows), the implied volatility in the FXE is still climbing. Not as much as in the past couple of days - but still climbing. As you can see in the volatility landscape below using OptionVision from Aqumin and ORATS, the green option series means the Implied Volatility is going up. The spikes shown are the strikes that are exhibiting larger than average volume. While the volume was relatively light this morning (when this was snapped) the implied volatility is still going up.

There is a little more activity in the downside puts in September and some extra call buying in August. The volatility trend is up in the currently fragile currency. The 130 line in the sand for the Dollar to Euro was May 1^st and the 125 Dollar to Euro was July 1^st. Until some substantial action in the Euro Zone takes place, a more volatile Euro is sure to follow. Last fall’s FXE IV high was in the 17% range versus just 11% today. With Greece unable to keep commitments, Spain not finding buyers of their debt, and no fiscal compact in sight, this volatility is only going higher.

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