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 FxVol Weekly
29 - July - 2022
The chart above is three-month CHF implied vol plotted against three-month EUR implied vol. Periods when EUR vol traded at a significant discount to CHF vol in the chart above generally were associated with EUR vol buying opportunities, while those times that CHF traded at a discount to EUR vol generally lead to declines in both. While the current spread is historically wide it is largely a sign in our view that EUR vol should now continue to trend lower. CHF implied vols are now at a substantial discount because the price action in EURCHF is dampening the price action in USCHF. While we are not in the business of interpreting the fundamental drivers one simple explanation is the view that the SNB has a larger runway to raise rates compared to the ECB.
The chart above is 3-month CHF vol less 3-month EUR implied vol. A bit more than half the time the spread from 2017 has been negative with CHF trading at a discount to the EUR. As you can see the current spread is close to the previous cyclical low. One obvious trade would be to short EUR vol and buy CHF vol which in our view is really largely a bet that EURCHF has come down too far. But it also may not be a bad trade to consider just owning CHF vol on its own, but not in the form of strangles but rather in the form of straddles, taking on less of a break-out view and more of a gamma trading view. Given the discount, this trade makes more sense but it would be re-balanced more actively or until a clear range break has occurred.
Some signs of divergence between the EUR spot and the EUR risk reversals suggest that the market has become less worried about further dollar strength. With the skew, this wide in favour of EUR puts over it really does make sense for corporate hedgers that need to buy EUR to look at a risk reversal hedge and establish it for vol and $$ credit.
A similar pattern with respect to EURCAD 12-month risk reversals except in this case it is not quite as evident as in the EURUSD chart above. While you can establish a long EUR position via the risk reversal it is not as large as in the case of EURUSD. In the EURCAD case, the natural hedging has been in favour of owing EUR calls vs CAD so the current discount while not as large still is enough to justify a risk reversal hedge rather than using the forward market.
EURCAD dispersion is showing signs of rolling over indicating a higher probability of near-term price consolidation rather than trending price action.
Short-term GBPJPY dispersion is showing signs of a bottom and in our view adds credence to the view that some sort of near term top has been made in the spot. Further yen gains now look more probable.
Clear signs of long-term EURJPY momentum rolling over and consistent with a top. Having said that the turn is muted in relation to the sharp pullback in the spot. A choppy correction lower is now more likely.
AUD vols selling off hard as the spot retraces back to 70 cents. The three-month spread is nearly back to being flat with the actuals.
In contrast, the CAD vol curve is holding up much better than we expected and the premium for CAD puts (USD calls), while slightly lower remains elevated. Any further marginal CAD strength is likely to see a much harder vol decline and with it the premium for CAD puts. While the skew is not as elevated it still in our view should move lower and in this case natural corporate US$ sellers should consider selling the risk reversal as a hedge but do so for vol and $$ credit.
Finally, the CHF 3-month IV remains lower in the relation to the actuals as the price action has been choppy and the broad ranges have held. This is likely going to continue in the near term and we would look to pick up some ATM CHF options and trade the delta's aggressively until we get a break in the choppy sideways price action.
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