One-month implied volatilities for euro/Swedish krona options are likely to spike to 9% at the end of the week from current levels of 6.6%. Thursday is one month before the Swedes vote on whether to enter the euro so the one-month trades will cover the result. This referendum has created an unusually shaped volatility curve. Two month implied vols are currently 9.15% and three-month implied vols fall back to 8.4%. One month volatility has already begun to move, increasing from 6.1% to 6.6% over the last week.
Recent opinion polls suggest 48% of Swedes will vote against joining the euro. If the country votes against joining volatility will stay at high levels, according to Giovanni Pillitteri, v.p. in fx options trading at Deutsche Bank in London. One month forward implied vols are currently trading at around 10%, a level that prices in this outcome. The Swedish krona will also depreciate against the euro if the Swedes vote no. If the yes vote wins then vols will immediately collapse.
The euro/Swedish krona has been range bound for the last eight months, trading between SEK9.15 and SEK9.30.
Pillitteri said the fx options market is the best way to express a view on the outcome of the referendum. Most investors are short options that expire before the referendum and long options with maturities after the referendum. These investors will be caught out if spot moves upwards as the referendum approaches. Pillitteri recommends investors buy pre-referendum euro calls/Swedish krona puts to take advantage of the likely upward movement of spot ahead of the vote.
EUR/SEK Spot & One-Month Implied Volatility
