9- Sept - 2022

AUD is nearing the top end of the channel shown in the chart above. AUD vols should sell off hard on a move back to 70cents and 2M AUD butterflies may look attractive in this context. The dollar bloc refuses to sell off as both CAD and AUD gained traction at the end of the week. Despite a weaker tone in the commodity space both FX pairs remain underpinned by strong domestic interest rate support. 

CADJPY breaks out of the channel and our daily dispersion indicator remains in a strong upward trajectory. No sign here of a break in the bullish upward trend. 

The hourly CADJPY dispersion shows a similar pattern and both our shot and longer term dispersion indicators are rising in tandem. 

A common theme in the FX market is very widespread in the near term IV-AV. This is particularly true in some of the major JPY crosses. While both short  & LT term CADJPY momentum remains bid the divergence between CADJPY IV and the spot could well suggest a market is nearing a potential secular top.  

If EURCHF can bounce off the par level it would imply that this move in EURCHF lower is only a correction in the new uptrend. Our long term momentum indicators remain bearish. 

As seen in the chart above one-month EURCHF vols remain bid and nearly at the previous cyclical highs. The persistence of the bid tone in EURCHF vols reflects the market's underlying concern of further bouts of CHF strength. Once the vol curve starts to melt it will confirm a likely rebound in the EUR back above par. 

EURGBP nearly takes out the important 87 spot level and our long-term  hourly dispersion remains in an uptrend. The back end of the EURGBP vol curve is at sell levels vs our internal models. Six-month or 12-month EURGBP butterflies may look attractive at these prices. Upside Condors may also be worthy of consideration given the skew in favour of EUR calls. 

We have taken out the LT trend line shown in the LT momentum chart above. At the same time the LT momentum model has turned positive. 

The late rally in the EUR on Friday has put the hourly momentum indicator nearly back to par. A failure here would suggest this is simply a short-term correction within a still longer-term bear EUR trend. The spec market remains long the USD and positioning will undoubtedly fuel short-term corrections. In order to believe that the dollar has topped you have to believe the ECB will keep up with the FED or that the FED will soon pivot. Both these assumptions may prove correct in the medium term but look to us unlikely in the near term.

No sign yet of hourly GBPCAD dispersion rolling over. While GBPCAD is finding support just above 1.5000 we have not yet seen evidence of a medium term bottom. 

GBPUSD on the contrary is showing some signs of forming a near term bottom with the spot holding above the key 1.1500 level.

GBP holds the key 1.1500 support and we have the potential here of a major double bottom. No sign yet of our LT momentum turning. One can imagine a policy mix of unbounded fiscal expansion in the UK combined with a much more hawkish BoE as providing the pound sterling with long-term support. This assumes the UK gilt market does not completely unravel given the size and the scope of UK fiscal expansion.  

The JPY came close to taking our hourly trendline shown above. While yen dispersion has not yet unambiguously rolled over,  we believe it will do so soon. While Japanese policymakers have started to verbally intervene in the market they still have not taken the action required to reverse yen weakness, notably letting the JGP market find its own level. 

Potential triple top in three-month GBPUSD implied vol. This could well be an indication that GBPUSD downside is nearly exhausted. Political uncertainty with the new government remains high. The UK may not be able to deal with the energy crisis as well as the EU. At the same time, UK-EU relations may well deteriorate further over the Northern Ireland protocol. 

Potential EURJPY triple top as well with one month EURJPY implied vol well below the previous cycle highs. 

Potential double/triple top in USDCAD. We would expect a good sell off in the CAD vol curve as we move back below 1.3000. An mentioned the BoC as well as the RBA may well be able to keep up with the FED in the near term but we would not be surprised to see them failing to keep pace as we approach the end of the year. 

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