With the substantial swings in the volatility of equities that have captured the imagination of journalists and punished investors who bought financial derivatives that profited from the low vol environment, we thought it would be helped to look at the implied volatility of the leading currencies against the US dollar. The chart looks at the three-month implied volatility for the euro (white line), the yen (yellow line), and sterling (green line) over the past year.
One thing that is immediately clear is that implied volatility had been trending higher in the foreign exchange market prior to the sell-off in equities that began a week ago. The three-month euro vol bottomed early last November near 6.0%. After firming into the start of the year, it was back near 6.4% on January 9 and by the end of the month was near 7.6%. It is near 8.2% now. The implied euro vol is holding just below last September higher near 8.3%. Last February was briefly above 11%.
The implied dollar-yen three-month fell to 6.85% in early January. This was the lowest since September 2014. It reached 8.8% before the end of the month. It spiked to 10% earlier this week and fell back to 8.83% yesterday and is now near 9.20%. Last September, the implied volatility reached almost 10.20%, and the high from 2017 was a little more than 13%.
Three-month implied sterling volatility bottomed on January 9 near 6.40%. It was the lowest since December 2014. It rebounded smartly and was near 9.0% before the end of the month. It spiked to 9.73% earlier this week and is now a little below 9.50%. It is above last September high (~9.10%), but last year’s high, recorded in early January was near 12.30%.
There are three takeaways from this review. First, volatility bottomed in these major currency pairs before the equity vol (VIX) moved above say 15%. Second, currency volatility is elevated, but still modest and below last year’s highs. The implied euro and yen three-month vol is a little below the levels seen last September. Third, the implied euro vol bottomed several weeks before the yen and sterling implied vol and it has risen the least. Sterling vol is the most elevated, but despite today’s swings, it is up the least on the day.