The theme this week is multiple signs of momentum divergence which could play out into a stronger dollar next week. Above is the AUD which now clearly showing renewed highs with less momentum follow through. Of course, the AUD can bounce off the par level and remove the divergence for now. That remains the probable outcome. Looking at AUD risk reversals, they continued to erode last week giving up further premiums for AUD puts over but the three months still has not broken back above -1.0 vol level. 

Looking at AUD daily dispersion, that too is turning lower which also indicates to us that the top-side momentum is flagging.

The small uptick in EURGBP actuals while at the same time the spot seems to be unable to hold above the topside resistance of 9060. The body of the EURGBP curve at the same time continues to slowly grind ever so slightly higher, while the skew in favour of EUR calls over has come down from recent highs.

EURGBP daily dispersion is also now below the lower 10percentile level. The odds of a directional trend emerging is high.

On a pure percentile rank basis one-week EURGBP under 6% is showing up as the least expensive, and on an IV-AV is showing up as fair value. Owning one-week EURGBP high delta strangles may make sense in this context, or if you want to express a directional view via options this is a time when the odds are more in your favour.

From a longer-term perspective, EURGBP upside momentum is showing signs of turning.

More momentum divergence in EUR. The odds of a more sustained correction are good. EUR short-dated options are fully priced and short-dated CHF options are even pricier.

GBP too is showing topside resistance with similar signs of divergence and a double top formation on the hourly chart as well. Two-week GBP options with implied vol of 8% or less is a fair bet with the actual running at 8.55. The market may overcompensate for the upcoming UK bank holiday and push the short dates still lower and that may well prove an opportunity if they do so.

Last momentum chart in GBPJPY showing a similar pattern. With the spot failing to break above 140 momenta is fading quickly and the odds of a stronger move lower increase.

One month CADJPY risk reversals are now above the 90percentile ranking. At these kinds of levels, it becomes prudent to employ an option based hedge if you are a buyer of CADputs(JPYcalls). In the one month that would still involve paying away something like 0.77 vol tics in the one month. The USDJPY curve is similarly priced but not to the same degree & so in our model the merits of a risk reversal hedge are a touch lower but still worthy of consideration.