Sterling and euro currency volatility may steepen this week when UK farmers fix their EU farm subsidy payments in pounds, predicts one leading analyst.
Bloomberg strategist Vassilis Karamanis says that for UK farmers who opt to get their payment in pounds, the exchange rate used will be the European Central Bank fixing rate on the last trading day of September.
Each year, a single bank wins the mandate to convert the full sum of farm subsidies, which totalled €3.3bn for the financial year 2013.
“Front-end implied volatilities in EUR/GBP have shown a tendency to rise in the final days of September each year. Between September 19 to 30, 2014, one-week implied volatility rose over 200 points to reach 8.16%. A similar pattern occurred in 2013, 2012, 2011 and 2010,” said Mr Karamanis.
He said this pattern is largely due to foreign exchange bank desks positioning themselves ahead of the conversion in anticipation of sharp fluctuation in EUR/ GBP price action. He cited traders in London and southern Europe.
He says EUR/GBP front-end volatility may steepen this week as farm subsidies reinforce last week’s momentum from quarter-end flows and rebuilding of long volatility positions.
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