FxVol Weekly
05 - Aug - 2022
Is the bull market for the dollar back on following the US NFP on Friday? As you can see from our short-term momentum chart above Friday's dollar rally has not yet moved us back to par, and we ended the week below the previous trendline break (brown line in the chart above). The important takeaway from the jobs report is twofold. First, it gives the FED the green light to raise rates by 75 bp again in Sept but at the same time, it may well be an indication that part-time rather than full-time employment is increasing. More people are entering the labour force because absent the stimulus checks and low-paying service jobs, to get by people are signing up for additional work. So while headline job growth may be increasing the quality of the jobs may not be that high. Given that wage growth continues to lag inflation, discretionary consumer spending may not pick up as one would expect given the headline payroll numbers.
Yen calls lost a lot of their premium on Friday as one would expect with the move higher in the dollar. But as you can see from our chart above the one-year Yen risk reversal is still below the previous high. Similar to our short-term momentum chart above this tells us that the fear of a much stronger dollar remains muted.
CADJPY implied vol is showing increasing clear signs of topping out and in a number of FX pairs we are close to breaking the rising implied vol trend lines. If this trend persists it adds credence to the view that the dollar rally is losing momentum. While the dollar may well make some new highs, particularly vs the EUR and potentially vs GBP, those new peaks may not correspond to new volatility highs. We would take that as a further confirmation of a secular dollar top.
Increasingly clear signs of topping price actions in GBPJPY with our long-term indicator starting to roll over. The risk in GBPJY is mostly GBP. GBP did find some short-term support following Boris Johnson's resignation and GBPUSD is well off its lows but renewed GBP weakness emerged following the BoE 50bp rate high and truly grim economic outlook with UK inflation set to top 13%. Secondly, with the Tories trailing in the polls, the new PM may well be tempted to provide further fiscal support to an already supply-side challenged economy. Given this backdrop, the potential challenges to GBP remain.
While vs CAD sterling is at least showing some tentative sign of finding at least a near-term bottom. However our short-term momentum models while positive are not at this point overly bullish. We suspect that at some point in the next quarter 12-month GBP calls may become an attractive trade once we have a clearer picture of the UK government combined with better indications of the end of the dollar rally.
Looking at the GBP hourly momentum chart it is significant that the six-month downtrend has now been broken. However, Friday's dollar rally has moved the spot back just above the trendline and our momentum indicator is fading. If we can take it out it will quickly re-establish the GBP downtrend and the possibility for a re-test of the 1.18 lows.
Here again in EURCAD clear indication of a potential break in the implied vol rising trendline. The rising trendline goes back to June of last year and if it breaks would be another good indicator of the trend exhaustion.
First early signs of EURCHF vol topping out. The implication here is that the CHF getting closer to the end of its rally.
While we have not taken out the rising GBPJPY trend line in 6mos implied vol we are close and now sitting right on top of the six-month AV measure. Implied vols in the majors remain expensive according to our models and only in some specific instances cheap in relation to the actuals. The exception has been CHF as we highlighted last week. Short-term implied vols declined as expected following the NFP but here too are still only marginally below the 50 percentile ranking levels.
Only the EUR is showing clear signs of breaking below the rolling actuals vols as you can see in the chart above but here too we have not clearly taken out the rising implied vol trend. Further dollar strength if and when it is combined with implied vol failing to make new highs at the same time would be a good indication of a secular dollar top. We need to see that kind of divergence first.
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