FxVol Weekly
07 - Jan - 2022
AUD has taken out the hourly trend line as seen in the chart above. Hourly momentum has now turned negative. AUD short-dated vols moved up on the week and the risk reversals as one would expect ended the week better bid for AUD puts over. Expectations that Australia will try to delay the tightening cycle is contributing to the weakness as well as the China slow down the story.
The rally in CAD vs the AUD has put the pair back above 1.1000 a level it has not seen in the past year. We take this as a sign of concerns about the China growth story since AUD is more leveraged to Asia than Canada. The same narrative can be said for USDJPY. As you can see in the chart above two week CAD actuals ended the week over the six-week levels. One month CAD implied vol remains good buy under the 6% level.
CADJPY as you can see in the chart above has breached the declining trend line but has not yet made new highs while momentum is showing signs of faltering. Ideally, we would like to CADJPY revisit the old high before initiation of a short CADJPY position in the form of a put spread.
The divergence on the longer-term chart suggests the likelihood that this could well be a longer-term top that is forming. If you wanted the scenario that would fit that description it would be that the backup in US yields is not sustainable and that the rally in WTI and energy prices, in general, stretched at the same time. But we would not take the position based on those fundamentals but purely on the basis of the short and longer-term divergences.
EURCHF has broken the downtrend seen in the chart above. Short term hourly dispersion is turning up while the longer-term remains subdued as the price movement so far has not been enough to trigger. We have been trying to call the bottom in EURCHF for some time and now at least we are starting to see some of our indicators come into line. As discussed a few weeks ago, one way to play this is to get long the spot and hedge it with an option. Say a three-month EUR put CHF call. That may cost roughly 150 tics and in doing that trade you are more committed to a fast impulsive move. The safer bet may be a EURCHF call spread where the premium is 1/3 of the spread between the strikes, e.g 1.0400/1.0700.
Daily EURCHF dispersion is also at an extreme low. It suggests that the probability of a renewed trend developing is high.
EUR dispersion is also at an extreme low. Here too there is a strong suggestion of a renewed trend developing soon. One month or two months 30-delta strangles?
With EUR implied under the actuals and with the EUR showing up as one of the cheapest pairs on the basis of IVAV spreads, one-month EUR strangles are probably a fair bet.
EURGBP is at a key level. Only a slight move lower could trigger a wave of hard EUR selling vs GBP. Short term momentum is suggesting at least that the selling is overdone. Longer-term momentum is trying to move lower. Skew in the options markets remains bid for EUR Calls over but the premiums have declined marginally. The market does not seem to be particularly worried about further GBP strength.
Short-term momentum is also showings of a top in GBPCAD.
Our longer-term hourly dispersion indicator is also suggesting a top in the GBPCAD price action at least in the near term.
GBPJPY short-term momentum is also showing signs of faultering.
Our longer-term hourly momentum indicator however has not rolled over just yet. When it does it will confirm that we have at least a short term top in place.
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Research Director