The May/June FX Vol Party of 2012
There was a strong degree of FX volatility correlation in 2012, reflected across the "majors" such as EURUSD and USDJPY and Cable, as well as "EM" pairs such as USDINR, and more esoteric pairs like "euro-zloty".
The bulk of this correlation can clearly be seen in the May/June period of 2012 when FX volatility peaked across the board, before subsiding in the latter part of June.
Europe Leading the Crazy Vol Market
The main driver for this craziness was Europe. The Bank of International Settlements covered this in their June 2012 Quarterly Review, whose executive summary was "Optimism Evaporates" (end of the second quarter 2012).
Sentiment around that time, reflected in the FX vol market, could have been due to:
"Upside Bias" in EURUSD Short-Term Volatility- What it Means
Looking back from January 2013, we see the EURUSD one-month at-the-money vols over a one-year period, has been biased to the upside in volatility terms (by this I mean there are observations beyond two standard deviations from the mean on the over the past one year (during the "optimism evaporation" period for the Eurozone, rapidly followed by the "condensation" period)) but no such observations below two standard deviations from the mean on the downside).
"Crazy Horse" Levels versus Average Vol Levels on EURUSD
During this "crazy time", mid-June vols were around 13% versus the current one-year average implied of 9% (we are currently trading below that at 8.5%). This second-quarter vol-spike is not unprecedented, though. It is also worth noting that the 1 year average of 9% is also below the 3 year vol average of 12%.
There was a strong degree of FX volatility correlation in 2012, reflected across the "majors" such as EURUSD and USDJPY and Cable, as well as "EM" pairs such as USDINR, and more esoteric pairs like "euro-zloty".
The bulk of this correlation can clearly be seen in the May/June period of 2012 when FX volatility peaked across the board, before subsiding in the latter part of June.
Europe Leading the Crazy Vol Market
The main driver for this craziness was Europe. The Bank of International Settlements covered this in their June 2012 Quarterly Review, whose executive summary was "Optimism Evaporates" (end of the second quarter 2012).
Sentiment around that time, reflected in the FX vol market, could have been due to:
- Concerns over the impact of fiscal consolidation on growth
- Financial health concerns for Euro-area sovereigns and banks
"Upside Bias" in EURUSD Short-Term Volatility- What it Means
Looking back from January 2013, we see the EURUSD one-month at-the-money vols over a one-year period, has been biased to the upside in volatility terms (by this I mean there are observations beyond two standard deviations from the mean on the over the past one year (during the "optimism evaporation" period for the Eurozone, rapidly followed by the "condensation" period)) but no such observations below two standard deviations from the mean on the downside).
"Crazy Horse" Levels versus Average Vol Levels on EURUSD
During this "crazy time", mid-June vols were around 13% versus the current one-year average implied of 9% (we are currently trading below that at 8.5%). This second-quarter vol-spike is not unprecedented, though. It is also worth noting that the 1 year average of 9% is also below the 3 year vol average of 12%.
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