Interpretation

How to read the index level, compare regimes, and avoid common mistakes.

Reading the Level

• Higher EVI generally indicates a higher expected range of FX moves (more uncertainty / risk).
• Lower EVI suggests tighter FX ranges and lower hedging cost pressure (all else equal).

Regime Thinking

FX volatility often clusters: calm periods persist, and stress periods persist. A practical interpretation is to compare the current EVI to its own recent history:

• Percentile (e.g., “EVI is at the 85th percentile of the last 3 years”).
• Moving baseline (e.g., z-score vs a rolling mean and standard deviation).

Cross-Pair Comparisons

Not all currency pairs “should” have similar volatility. When comparing pairs, keep the comparison conditional on:

• Liquidity and market depth
• Policy regimes (pegs, managed floats, capital controls)
• Commodity sensitivity or single-sector dependence
• Event calendars (elections, central bank meetings, fiscal announcements)

Common Misinterpretations

• Volatility ≠ direction: a high EVI says “bigger moves,” not “up” or “down.”
• Index ≠ forecast certainty: implied vol is a market price, not a guarantee.
• One number hides structure: skew, tails, and jump risk can change without large changes in at-the-money vol.

Practical Notes

EVI is best used as a context signal alongside exposure maps, correlation shifts, and liquidity conditions—not as a standalone decision rule.