Forex Flash: Short covering in Euro corresponds to lower volatility - BBH

FXstreet.com (Barcelona) - With Euro among strongest major currencies for last 2 days, Marc Chandler | Global Head of Currency Strategy at Brown Brothers Harriman notes: "While we continue to look for technical evidence that the euro's corrective advance is over, there is frankly little to hang one's hat on presently. The $1.2600 has been flirted with intra-day basis, but has not been maintained on a close basis. If this is achieved, we see potential to $1.2700 and possibly $1.2740," Marc says.

The analyst have noticed the following correlation between volatility and the recent rise in Euro: "We have understood the price action in recent weeks as a spring coiling. The short covering in the euro corresponded to lower volatility. Last week, the three month implied volatility rose every day last week, but reversed at the end of the week. We note that the correlation between percentage change in the euro and in three-month implied volatility is inverse by nearly the most it has been since the advent of the euro. The inverse correlation is about -0.63, rarely has it been beyond -0.60," Mr. Chandler concludes.

In other words, Marc explains: "As the euro rose in recent days, the premium the market was willing to pay for euro puts over calls, equidistant from the forward (risk-reversals) actually increased marginally. Even for participants who are not involved in the options market, important insight maybe be gleaned."