FxVol Weekly
18 - Feb - 2022
Implied vols across the FX markets fell marginally last week in the face of the Ukrainian standoff. Risk-reversal moved sharply lower in the JPY and JPY crosses. The largest move was seen in EURJPY, CADJPY and lastly GBPJPY. Two trades we have been on our shelf for consideration now look a bit more attractive, one in CADJPY and the other in GBPJPY.
The move-in CADJPY 3-month risk reversal was just as dramatic as the move in EURJPY. The reason we are not looking at the put spread trade in EURJPY is that we are not seeing the same degree of momentum divergence as recorded in CADJPY and GBPJPY.
CADJPY daily dispersion adds further evidence to the put spread trade we have mentioned in the past few weeks.
Hourly momentum is close to breaking down through the lower end of the triangle formation. While we could get a bounce off Friday's close the odds in our view remain that a downside break is a more likely outcome.
And hourly dispersion also is low and bottoming. At a minimum, this suggests a near term end to the price consolidation.
The long term momentum picture remains bearish with clear signs of divergence.
The market is clearly worried. Similar to EURJPY, EURUSD risk reversals moved sharply better bid for EUR puts over but not yet back to the previous cyclical low.
Clearly the short term positive momentum trend has reversed and we now have a double to on the hourly and near term potential break of the hourly triangle.
One week GBPCAD closed around 5.2 and given the geopolitical backdrop looks undervalued despite the clearly depicted declining downtrend in the actuals seen in the chart above. If you can own it below 5.5 it is probably a good trade for 30 delta strangles.
The same low reading on GBPJPY daily dispersion combined with divergence suggests nearing the end of consolidation and likely major secular top.
LT EUR momentum looks very stretched. We remain of the view that there is one leg lower but that the big move down is nearing an end.
As you can see the EURJPY vols in the front end are spiking higher on the back of the rising geopolitical tensions. While our models are showing this as expensive (as you would expect) we should point out that prior to the great financial crisis in 2007/2008 EURJPY vol moved up in a step-like formation and then went ballistic as the S&P crash got into full swing. Our models are good at picking up vol mean reversion, but less accurate if we are in the early stages of a major geopolitical or financial crisis. With this in mind, the safest way too short EURJPY vol in our view is via selling EURJPY call spreads, i.e sell 2M 40 delta EUR call and buy a 25 delta EUR call vs JPY.
One week CHF closed mid 5.5 level Friday. This too looks like fair gamma if you can get it at similar or close to this level on Monday's open.
If the MXN peso can finally break below 20.00 we would expect a deluge of vol selling as the actuals will very likely continue to trend lower.
FxVolResearch Ltd operates under an exemption order issued in 2003 by the BCSC. The material in this report is intended for accredited investors or professional FX risk managers, traders, portfolio managers who are familiar with and knowledgeable of FX derivatives, and understand the potential risks inherent in options trading. The material in this report cannot be reproduced or re-transmitted in any format without our expressed consent. 
Research Director
Skype: jamesrider1