Whip it: Don't think, just trade
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Foreign Exchange

Whip it: Don't think, just trade

At the start of every week, I wonder what news will materialise for me to write about. Amazingly, something nearly always comes up, even at times like this when many market participants have gone on holiday.

Things look to have settled into a range. That will please some players, including, I’m told by Drew Niv from FXCM (see story), many retail punters; but not others, such as the trend followers. In an attempt to stem my growing reputation of being a reverse indicator, I decided to look at options and see if there are any clues for where the dollar might be going.

A chart of one- and three-month implied EUR/USD vol seems to reiterate that the market is range bound. But one mucker told me that it’s not quite as straightforward as it seems: “Vol is very choppy. The market is very thin at the moment, so moves don’t make sense. It’s not a time to be too clever.”

EUR/USD vol gets whippy
Historical analysis - EUR/USD for 23 Jan - 23 July 2008
 Source: SuperDerivatives

With correlations all the rage, I thought I’d discovered a real gem when I looked at spot USD/JPY and the three-month risk reversal. “Take a look at this,” I said to one prominent buy-side trader. “Is this relationship breaking down and what does it suggest about spot USD/JPY?” His reply was succinct: “It’s interesting, but I’m not sure what to make of it.

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