The CurrencyShares British Pound Sterling ETF (FXB) has a 30 day implied volatility (IV) of 27.6%. This means that the options market is pricing in a move of plus or minus 8% on the British pound ETF (FXB) within the next month (note this is a proxy for the GBPUSD currency pair).
The precise calculation to find the expected move based on the IV-30 percentage is (IV30/sqrt12) ~ (.276/3.464) = 8.0%. The upcoming Brexit vote and decision is obviously casting uncertainty on the British Pound.
Looking at the Implied Volatility (IV) curve, we see that the IV30 is greater than the IV60, which is greater than the IV90. The implied volatility on the British Pound ETF is in steep backwardation. This means volatility is particularly expected in the near term. I would expect the near-term IV to decline sharply once the news is released. Technicians often like to say it is best to ignore news, however there are situations in which news drives market and trading action. Clearly, this news announcement is driving options pricing in the British Pound ETF and trading positioning in the GBPUSD.
As the Brexit vote nears, you can see the IV Index Mean, which is a compilation of near-term implied volatility, is rising sharply. It is currently double the highest reading prior to May. Some big moves are definitely priced in.
Turning to the price chart of FXB (see below), you can see a general trend on the British Pound from top-left to lower-right. We have a declining 200-day moving average, indicating a bearish longer-term trend (as would be expected with a 1-year chart in a downtrend). The nearer-term moving averages (20 and 50) have turned flat after a short-term uptrend in price from the end of February through May. The last few days have caused damage to the chart – breaking both the uptrend line from February. The RSI indicator at the top of the chart shows momentum, thought to lead price, broke its trend in late May. The price chart implies a bearish leaning heading into the Brexit vote.
Thanks for reading and good luck out there.
Twitter: @MikeZaccardi
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
