The Curious Effect of ECB’s Stimulus Package on the EUVIX Index
On Thursday, ECB President Mario Draghi announced a cut in interest rates and purchases of corporate bonds. In the same breath, Mr. Draghi said he hoped there would be no further cuts. The Euro promptly dropped to $1.08, then rebounded to $1.12 by the close.
Yet the CBOE/CME FX Euro Volatility Index (Ticker: EUVIX), the expected volatility of the EUR/USD rate, decreased from 12.28 to 10.85 (using closing values) on Thursday. At first, this might seem curious. However, recall that EUVIX is a measure of expected 30-day volatility. The signal the currency market is sending is that it is not expecting further repercussions to the ECB’s announcement, or fresh sources of volatility over the next month, in other words, a tightening in U.S. interest rates. This makes sense because the fed funds futures contract indicates that the chance of a rate hike at the March 16, 2016 meeting is 4 percent and only 21.3 percent for the April 27, 2016 meeting. Volatility indicators for the U.S. equity market and U.S. 10-Year Treasuries market are also decreasing, as are the CBOE/CME FX Yen Volatility Index (Ticker: JYVIX) and CBOE/CME FX British Pound Volatility Index (Ticker: BPVIX).
Figure 1. Comparative volatility levels: VIX, TYVIX and foreign exchange indicators
Figure 2. Weekly update of volatility levels
Forward Volatility Flattens
While VIX is still in contango, forward volatilities of TYVIX, EUVIX, BPVIX and JYVIX are ending the week on a flat note. Investors expect there will be less volatility ahead.
Figure 3. Term structures