FxWirePro: EUR/USD 3M IV Regime Covers ECB, FED and UK Referendum, Huge Divergence Between Spot and Risk Reversals

FxWirePro: EUR/USD 3M IV Regime Covers ECB, FED and UK Referendum, Huge Divergence Between Spot and Risk Reversals

The 3M implied volatility had almost reached below 8%. It is now appeared at a threshold between two price-action regimes, in a long run IVs of this pair is flashing in average of 9.5%. While there is divergence between spot and risk reversal curves.

With the spot returning towards the middle of its range, it is now unlikely that volatility will experience a regime switch.

EUR/USD vols are trading close to its least level since the beginning of 2015. The analysis shows that implied volatility is probably at the floor of a persistent and stable high-volatility regime, signifying a considerable likelihood of mean-reversion towards higher levels.

With no range-breaking move in sight and the FOMC statement out, EUR/USD volatility is coming under sharper selling pressure.

Only 2m volatility is discounting a moderate premium for the UK vote on 23 June, and ATM volatility is otherwise trading very close to its lowest level since the start of 2015.

At this stage, the question is whether the current levels represent a very attractive entry point for reloading long volatility positions or whether the market is on the verge of switching to a lower-volatility regime.

The odds favour a bounce in realised volatility, as the spot should remain turbulent. The 3M tenor includes the 2 June ECB meeting, the 15 June Fed meeting and the 23 June UK vote.

Volatility more predicable within its range, in a regime of high and stable volatility.

Implied volatility has been strictly range-bound at relatively high levels for more than a year. If the stability persists, volatility will become more predicable within its range.

In this framework the regimes persist over time, and switches thus announce significant turning points in market dynamics.

It turns out that the model switched into a high-vol regime when the range-bound period started and that this regime still prevails.

Therefore, the current regime may encapsulate both the volatility level and its stability.

In our view, the current risk-reward highly favours long vega positions.

The material has been provided by www.instaforex.com