Here at OmiCronFX we are always conscious
of the volatility of currency pairs. It is one of the factors that must be
taken into account when we set the parameters for the Mandelbrot Algorithmic
Forex trading software. The tool we use for this, for the Euro – US dollar pair,
is the EVZ index, which is maintained by the Chicago Board Options Exchange, or
CBOE.
This index uses the same methodology
as the well-known VIX index, which the CBOE has been publishing for many years
now, and which measures volatility, or to be more precise, implied volatility,
for equities and equity indexes. Known in the business as the ‘Fear Index’, the
VIX is compiled each week based on an analysis of the volume of options that
pass through the CBOE’s option exchange. It is known as the Fear Index because heightened
option activity indicates that market participants are hedging against the fear
of a fall in whatever instruments they taken positions in. Each of these
indexes attempts to look ahead by about 30 days to give an indication of what volatility
will be like in the underlying during that time period.
The CBOE Forex implied volatility
index, EVZ, has been elevated for a little while now. It has been running at
well over double its value of a year ago. Recently however, it breached the
highest high it has been since the middle of 2012 (see chart above).
Volatility
is down to two concerns
This heightened level of implied
volatility is brought to you courtesy of the twin concerns around the imminent
start of interest rate rises in the US, and the Greek question in the Eurozone.
One, an interest rate rise program in the US, is definitely going to happen,
the only issue is when, while the other, whether or not Greece will be forced to
leave the Euro, with all the turmoil that can be expected to bring, seems to be
as much up in the air as ever but with a real crunch deadline, the repayment of
IMF loans for which the country does not have the resources and which will not
be extended, coming ever closer. It is now one minute to midnight as far as
Greece, and the Single Currency, is concerned.
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