FxWirePro: Euro vols still looks low for EUR/USD swaptions compared to rates

There are also reasons on the EUR side of things for not allowing the EUR euphoria to go too far. Some European Central Bank policymakers are having doubts about signaling in July that they are moving closer to dialing back their easy-money policy.

Conversations with six central bank officials from across the euro zone showed they had been unnerved by a rise in the euro and in government bond yields after ECB President Mario Draghi opened the door last week to policy changes.

Not yet attractive to sell EUR vol. Some may be tempted to benefit already from the spike in EUR swaption vols triggered by last Tuesday’s Draghi speech in Sintra. EUR rates vol is still c.0.5bp/d below the highs of last March on average in the gamma space. The best mover in EUR gamma last week was the 3m5y (excluding 1m expiries). In longer expiries (1-5y), the 2y tail vol increased the most. Among major mid-curve benchmarks, the 3m2y3y was the outperformer, moving from 2.8bp/d to 3.6bp/d.

EUR vol is up, but from very low levels – so it is still below the highs seen last March, and well below levels reached in June 2015. As a result, EUR swaption vol still looks quite low compared with the level of rates. This is a legacy of several weeks of very low realized vol in May and June.

Often our preferred choice for conditional rolldown, the 6m5y2y ATMF/-25bp 1x1.5 ratio spread costs 6.5bp (indicative) and generates unlimited losses at expiry below 0.73% (indicative 6m5y2y fwd 1.37%) – this is a level last seen in early November 2016, just before Trump’s election. A zero-cost 6m5y2y 1x2 receiver spread is 40bp wide (indicative) – here the breakeven (0.97%) is in the bottom end of the 6m range.