FxVol Weekly
25 - Feb - 2022
While not showing up as a "buy" on our percentile rank model, the short-dated CHF implied vols do look attractive both on a relative value basis (compared to other FX pairs in our database) but also on the basis of IV-AV spreads. The market is assuming that USDCHF vol will be damped down by movements in EURCHF and this may well be true on further EURCHF sell-offs but it is unlikely to be the case should EURCHF find a meaningful bottom. This has two implications. First, if you are a good to confident delta hedger the short dates look attractive, and second, if we do start to see a credible bottom in EURCHF then USDCHF should start to move higher. The other opportunity we will look for (at the moment we do not have enough evidence to support this) would be to structure a longer-dated EURCHF Condor structured to the upside. This is a trade for another day in our view but now, it is an idea that should be noted and filed for review once we get confirmation from other signals.
AUD dispersion remains under pressure as you can see the upper and lower boundaries narrow in our daily chart above. Given our underlying mean-reversion view this is not sustainable over the long term. AUD vols remain high as one would expect and AUD risk reversals remain heavily skewed to the downside to the point where the three-month AUD risk reversals look cheap. Corporates who are natural sellers of AUD puts and buyers of AUD calls should take note.
We continue to view the topside in CADJPY as limited at best. Dispersion now below the lower boundary suggests to us that the sideways consolidation is nearing an end. We continue to think the break when it comes will come to the downside. The same view holds for USDJPY where it has tried and failed twice to sustain levels over 116.30.
Whenever we pull up the short-term correlation of spot and one-month vol we do so with the warning that it is not the most reliable indicator. With that proviso in the past week, the indicator has flipped suggesting further near-term upside potential for the dollar.
EUR actuals still rising and remain under the actuals based on Friday's close. Still, the better value trade according to our in-house models are found in USDCHF. The EUR rise on Friday was consistent with the overall risk relief rally in asset prices. It is not likely to be sustainable unless we were to see a full Russian demarche - and that prospect seems highly unlikely. What the events last week do support in our view, is the theory that Putin has miscalculated both in terms of the response both in the West and in Ukraine, but also internally. The view of Putin as some sort of master political tactician -- staying always one step ahead of the west -- has not had a great week. This will be reinforced if he fails to get a full-throated Chinese endorsement of his war of choice.
Friday's bounce in EURJPY does not look sustainable based on short-term hourly momentum indicators. With that in mind, we are near the top end of the downward sloping trend line connecting the highs on the hourly chart. We would need to see that taken out first to confirm a more sustainable trend higher.
GBPCAD remains without question the currency pair most likely to mean revert and this is the reason GBPCAD premiums often are quoted at a discount to GBPUSD, but this discount is now getting stretched to the point where GBPCAD gamma options, while not oversold are certainly priced in line with the daily actuals.
GBPUSD daily dispersion is now below our lower bound. At the same time, we are seeing a clear formation of a double top on the charts as well as a clear channel pattern. A break and retest of the most recent cyclical low under 1.32 are probable.
Possible setup for triple momentum divergence. Selling off the upside via call spreads or buying put spreads remain two possible trades worthy of consideration.
Yen actuals are showing more signs of life but still, the short-dated yen remains the most expensive based on IV/AV spreads. Key resistance at the 116.35 level needs to be taken out to confirm further upside. LT momentum indicators are not supportive and we doubt a sustained break is likely. We are adjusting our USDJPY hedge ratios level down.
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