FxVol Weekly
01 - Apr - 2022
AUD hourly momentum is looking stretched. The support from the commodity complex is fading as broad commodity prices based on the DJ 60 look to have topped out.
With short-term dispersion falling and our longer-term measure flattening out the chances of AUD making fresh highs in the near term are fading.
AUD implied vol tends to weaken off on AUD rallies. The geopolitical backdrop has understandably supported implied vols in the near term but as the war in Europe turns into a stalemate most of the near term risks are priced into the markets.
CADJPY momentum finally starting to turn. We continue to see significant divergences between our daily long term momentum indicator and spot.
EURCAD continues to show clear indications of bottoming. In the near term, we are in for a period of price consolidation. Long-term EURCAD momentum is still decidedly bearish.
Early signs of a potential USDJPY top as hourly dispersion starts to roll over. Yen risk reversals are now cheap for Yen calls.
The chart above is a one-month Yen risk reversal going back to 2017. Historically when the yen reversal trades at or above par it is usually close to the end of the USD rally. Any corporate hedgers who are naturally short yen should have a risk reversal hedge in this environment as the odds are in your favor (sell yen puts and buy yen calls).
EURJPY momentum as also topped out.
Based entirely on IV/AV spreads one month EUR is not expensive. Based on our percentile rank indicators the one month remains expensive. Gamma is likely to remain worth owning but we would be inclined to trade it aggressively.
One year CAD implied vol has topped out as one would expect with the CAD rally to 1.2500.
Despite the CAD rally the back end of the CAD risk reversal curve remains expensive for CAD puts over calls. With commodity prices off their high support from interest rate differentials may not be enough to sustain the CAD rally particularly if we get synchronized 50 bp moves north and south of the border. The back end of the CAD risk reversals curve should remain under pressure as the spot consolidates around 1.2500.
CAD actual vols trending lower with the two-week breaking below the six-week measure.
MXN peso implied vols will remain under pressure as long as the spot holds below 20.00. The MXN risk reversals are now showing up as cheap for MXN puts vs. calls. The front end of the risk reversal curve is now a buy for MXN puts over calls from the perspective of a corporate hedger. As long as the Banco de Mexico continues to follow and outpace US yields it is hard to see how the MXN is going to weaken substantially in the near term. This latest break under 20 could turn out to be more sustainable and lead to a persistent erosion in MXN implied vols. and even lower premiums for MXN puts.
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