NZD/USD Volatility Expectations Highest, USD/CAD on the Low-end

What is expected to drive the FX market during the final weeks of the year?

In the table below, we’ve listed implied volatility (IV) levels for major USD-pairs looking out over the next one-week and one-month periods. Also noted are the differentials between the two, which can help shape expectations and/or identify currency pairs where the options market may be under or over-pricing potential price movement in the short-term. Additionally, below are derived one-week range-low/high prices from the current spot price within one-standard deviation. (Statistically speaking, there is a 68% probability price will remain within the lower and upper-thresholds.)

Short-term expectations for price movement has dropped off significantly with a light economic calendar and holidays coming up on Thursday in both the U.S. and Japan. While the FX market will remain open, both of these major financial hubs will be mostly shut down for the day. This will have an impact on liquidity and market activity.

The differentials between one-week and one-month implied volatilities is negative across the board of major USD-pairs, displaying the anticipated lack of volatility in the days ahead.

NZD/USD continues to consistently show the most ‘promise’ for volatility despite implied volatility declining in recent weeks, while USD/CAD has declined to a level showing the smallest expectations.

NZD/USD one-week IV at 8.8% points to a one-standard deviation range of 6747-6913. Kiwi remains one of the weakest USD-pairs, with it recently trading down to its worst levels since early June. The next major area of support arrives at a trend-line running off the 2009 low, which could be in confluence with a swing-low from May of last year. In the coming days it would likely require a catalyst to see long-term support touched, the one-week projected low at 6747 doesn’t appear likely to be exceeded at this time. If an attempt is going to be made on the top-side, a break through the trend-line off the September high will need to be accomplished. Trend weakness suggests the one-week high at 6913 is unlikely to be exceeded. A period of digestion may be upon us.

USD/CAD one-week implied volatility sits at a low 5.96%, and project a range of 12659-12869. Price is currently grinding higher on a trend-line off the September low. The fact the line is being hugged puts it at risk of breaking, and should we see a close below trend support the swing-low at 12666 along with the projected low will be put at risk of breaking. If we see a sound break of the trend-line, volatility expectations could prove to be too low. On the top-side the projected high roughly aligns with the most recent swing-high and could keep any advance in check.