Easter Lull in Volatility Market May Give False Riksbank Signal
(Bloomberg) -- Options contracts on the Swedish krona capturing the Riksbank’s policy meeting in April suggest no more risk than normal. But that may change once Easter is over.
The outlook for Riksbank’s first interest-rate hike in seven years is now in doubt after most of the central bank’s policy makers discussed delaying it. Banks such as Swedbank AB aren’t waiting for officials to update their rate projections at the April 26 meeting and have started pushing back estimates for the first move, after two inflation prints missed Riksbank forecasts.
Still, one-month volatility in euro-krona is only 41 basis points higher than Friday. That compares to an average increase of 44 basis points one month ahead of a Riksbank meeting since the beginning of last year. Meanwhile, the Swedish krona has fallen more than 1 percent in the past five days against the euro, partly on the risk of a setback in the rate path.
One possible explanation for why volatility hasn’t increased more despite the event risk is that the contract measures the estimated average volatility during its one-month life span. And currently that average is likely weighed down heavily by the Easter holidays, which bring some of the calmest trading days of the year, according to Fredrik Lockne, an options specialist at SEB AB.
“The market expects very low volatility around Easter, but I would expect it to rise quite substantially once the holiday is over,” he said.
Another gauge of the risk linked to the event may be provided on Thursday, when two-week options contracts will first capture the inflation print for March, which will be the last the Riksbank gets before heading into its policy meeting.
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