FXVOLRESEARCH
Weekly FX Review
30 -June - 2017
Last week we highlighted the opportunities available in short-dated options and singled out four currencies that were undervalued according to our internal models: AUD, EUR, CHF, and JPY. Here are the results of those recommendations. Based on a spot of .7568 a one week straddle on AUD would be struck at .7567 for a cost in terms of USD points of .0054. At 10 am NY expiration one week later the spot was at .7680 for a net gain of .0113 points or a net gain of .0059 tics or in net in terms of capital-at-risk of 109%. In the EUR the one week straddle would have been struck at 1.1199 off a spot of 1.1195 for a premium cost of .0070points. The spot at expiration one week later was 1.1399 for a total gain of .0204 point or net gain in terms of capital-at-risk of 191%. In the CHF off of a spot of .9691, the straddle would be priced at .9688 for a cost in tics of .0061. At expiration one week later the spot was at .9587 for a gross gain of .0101 and a net gain of .0040 or net return on capital at risk of 66.6%. Lastly, the Yen was basically a wash. Based on a spot of 111.28   strike  would be 111.25 and the cost in would be .75% or approx 83 yen tics. The spot at expiration was 112.03 so the option basically had a loss of .03 yen tics. Basically flat on the week. The above examples could also have been leveraged with strangles, in which case the gain in the EUR would have in % terms been far higher, and the loss   in  the Yen would have been greater. In my view, it is better to leverage these trades and reduce the bet size rather than own the straddles. The reason is that its much more of a leveraged be on the miss pricing but in doing so you have to accept a lower win-loss ratio. As mentioned in early weeks commentary one of the reasons these trades arise is that the market is long the body of the curve and is looking at ways of mitigating the decay bill. As a consequence, the micro-dates get oversold. Secondly, the market places  too high a premium on what one could call "heavy economic days" for example the US NFP, or the ISM report for example. These dates get bid up far in excess of their real value. As a consequence, a week that is light on economic releases tends to offered too cheaply. 

The rally in the EUR only corresponded to a  rise  off  the 6% floor in two week EUR actual vol. Despite a strong directional move on the week, it was still not enough to get the two-week actuals over the six-week.

 

The chart above is the EUR one week implied and actual vol using daily data. Notice how implied did not keep pace with the sharp spike in the actuals and the spot. The market still wanted to short vol ahead of next week's US holidays. Meanwhile, AUD short-dated AUD  vols  ended the week bid as some operators are taking the view that the RBA will follow the rest of the world's central banks by adopting a less accommodative tone. 

The Canadian dollar took out a long term trend line going back to Sept 2014. The expectation of a 25bp rate move as soon as July's meeting is largely factored in the price. A similar move in the Fall would just remove the extraordinary monetary stimulus added following the oil price collapse. The wash out of stale US longs may not be entirely complete. In the interest rate futures market a very large trade went through betting on a further narrowing in US-CAD interest rate differentials. If the spot is unable to hold above 1.3000 next week a re-test of 1.2775 is on the cards.   

The Vortex indicator is still long CAD and short Yen. We mentioned last week that it was still long but that the signals were getting weaker. Last week proved that analysis only partly correct. 
CADYEN  now looks likely to re-test the 88 level. Once again, it does look that the upside momentum is starting to fade as the bands of the Vortex indicator narrow (the blue and red lines in the chart above). 



The AUD is forming a large triangle formation that is typical of declining vol trends. As mentioned here last week, the leveraged community is short AUD. Last week, we saw a pick-up in demand for AUD puts while the spot rallied. This week,  AUD risk reversals moved back in line with the spot on this week's price action (lower premium for AUD puts).  Now we may well have a similar set up in the AUD that we have recently seen in Dollar CAD. If we can take out the triangle then it increases the chance of an impulsive move higher. With copper breaking out to the topside and iron ore finding a bid this outcome is more likely. Historically the RBA is more aggressive than other central banks in their willingness to talk down the currency. Less accommodative chatter from the RBA, if it were to happen, would suggest that they are not concerned by the level of the AUD. If at some point down the road the RBA were to express concern, they would not be shy to intervene both verbally and potentially with direct market action. The RBA has a good track record at calling market tops and their rhetoric should not go unnoticed. 

CAD short term STDEV indicators are not yet rolling over, implying that the short term trend is still intact. 

 
Similar to the AUD, the  Yen   has  been forming a long-term triangle pattern that is always associated with declining vol. 
 


We highlighted last week the break in the GBPJPY hourly trend line. Most of the heavy lifting has been done by GBP while the Yen had a more modest move on the week. GBP faces some serious topside resistance just over the 1.3000 and as mentioned above the yen is threatening a triangle break. A move back to the old 148 top minimum looks on the cards. 
 

 

The hourly on GBP shows the clear topside resistance. Owning 3M GBP  vega  is still in our view a core long trade that should be re-balanced periodically. The price action continues to suggest slow grinding moves higher, followed by short impulsive moves lower. 
 

 
The EURJPY STDEV is suggesting this is just the  beginning of a larger move higher.  

 


More clear signs of EURGBP momentum divergences. The market wants to short sterling and the trade is crowded. 



 

CHF spot looks poised to take out a long-term trend line while 3M CHF vols also look similarly positioned to trade above their much shorter down trend line. In any sustained moved toward risk aversion,  CHF has been known to trade higher, and in some cases, spike higher. 



 
Here is the copper chart showing the breakout from the channel formation. With oil finding short term support, this adds up to a tailwind for the commodity bloc.
 

 
One month EUR risk reversals are now bid-over for EUR calls, while the 3M is close to flat and the one year remains bid for EUR puts, but the premium has declined slightly over the week. 

 
 
 


Last week, one month CAD risk reversals nearly traded at flat. If the front end CAD calls get bid over relative to puts, it often signals exhaustion of the price move and may be a good signal to fade the C$ rally.


Links to previous FxWeekly

May 26 th
 
June 2 nd

Junr 16th, 

June 23rd
http://conta.cc/2u4l8IR



 
 
Best Regards, 
 
James Rider
FXVOLRESEARCH  

Direct: 604-685-4414
skype: jamesrider1


Send me an email if you would like  to be added to this weekly distribution list.