FxVol Weekly
04 - Mar - 2022
CADJPY daily dispersion falls below our lower bound indicator and suggests that we should start to anticipate some trending price action soon. Ignoring for the moment the war in Europe which can be a strong catalyst for renewed JPY strength as we have seen a sharp drop in EURCHF, a slowing global economy with lower bond yields, and lower commodity prices would be conducive to further yen strength. Whereas what we have seen in the past week is renewed strength in the AUD on the back of a stronger commodity complex in general and iron ore in particular. While Canada started its hiking process this last week with a quarter-point rise, given the amount of leverage in the economy it is doubtful that BoC can sustain more than a few rate rises over the balance of the year, unless USDCAD rises through 1.3000 vs the dollar the BoC may actually be more comfortable with a more sustained rate rise. While the rise in oil prices if sustainable would be supportive of the CAD it is not likely to be a sustainable driver over the medium term particularly if the global economy slows down further.
The chart above is the same dispersion indicator using hourly rather than daily data. As you can see by Friday's close the short indicator is just moving up over the longer further implying a conclusion of the sideways consolidation pattern.
No sign of EUR weakness ending vs CAD any time soon. We will need to see a reversal in the hourly dispersion indicator to give us the first hint of an end.
You do not need to be a rocket scientist to know EURCHF volatilities are high by any measure. The chart above shows the rise in the actuals in the past week and the similar rise in the implied vol curve is still more dramatic. In the current macro backdrop of a major land war in Europe, it is difficult to gauge the potential downside risks to EURCHF. Obviously, the SNB is going to be concerned but there is not much they can do to stop the inflows into the CHF in the near term. While the body of the EURCHF curve is expensive we would not look to short it with our usual short vol strategies unless and until we begin to see a meaningful reversal first in the rising vol trend. EURCHF risk reversals skew has blown out as a consequence and any lingering bids for EUR calls in the back end of the curve have been reversed to the point where the whole EURCHF risk reversal curve is now showing up as "cheap" for EUR calls over EUR puts vs CHF.
The long-term momentum picture on EURCHF has also turned lower.
Hourly dispersion shows no sign yet of turning down. The trend is still intact until such time as we see the long term hourly indicator rolls over.
We just broke the key downside support for EURGBP but also take note that this has not yet produced a new LT momentum low.
No sign here either of a bottom in EURJPY with both indicators still rising. Like EURCHF, EURJPY skew blew out further to the downside to the point where natural corporate sellers of JPY calls and buyers of JPY puts vs the EUR should seriously look at doing some hedging via the risk reversal.
And here too we do not have any sign yet of a pause in the EUR downtrend. And again here too, if you are a corporate and a natural seller of EUR puts and buyer of EUR calls, now would be a great time to seriously consider the merits of a risk reversal hedge.
Short-term dispersion just breaks over our longer-term measure. The downtrend in GBPJPY is not over.
It looks as though we will get another retest of previous support below 1.3200.
EURJPY LT momentum. Congestion and support should be found at 125. If it gives way further support in the mid 122 area.
One year EURJPY implied vol close to the previous cyclical high near the 10% level.
Yen hourly dispersion is still low and shows no sign yet of reversing the downtrend.
JPY has to take out the hourly trend line shown above to move short-term momentum into negative territory.
The chart above is the one-month MXN implied vol less the three-month IV.
There may be some calendar spread opportunities in the MXN curve. In particular the one-month vs three-month vol spread may be attractive using MXN calls (selling the one month and buying the three-month.
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Research Director
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