EUR/USD Volatility Divergence Suggests Future Swings Against USD
Commerzbank's Volkmar Baur points to a divergence in volatility for EUR/USD, suggesting that markets expect increased swings against the US Dollar. According to Commerzbank, the realized three-month volatility of the EUR/USD exchange rate has dropped to near five-year lows at 4.53%. This is an unusually low level, with only three instances in nearly 20 years where it was lower.
Baur notes that while central bank expectations and oil prices have contributed to the calm, they cannot fully explain the move. A comparison of EUR/USD volatility against other G10 currencies shows a correlation between low exchange rate volatility and highly correlated central bank expectations this year.
The key point, however, is the divergence between historical and implied volatility. Normally, these two indicators move in tandem, with 80% of implied volatility movements explained by historical volatility over the past nearly 20 years. However, at present, implied volatility exceeds historical volatility by more than one percentage point.