Short-Dated IV/AV Spreads

The short dates are expensive, in particular, the JPY and JPY crosses. This may well provide some short trading opportunities to sell the two weeks and buy the one month. Even with short-dated EUR options showing up as cheap on a percentile basis they remain expensive in relation to realised vol. Even with CAD actual vol declining it still shows up as the least expensive on an IV/AV basis in the one-month tenor.

AUD dispersion looks to have bottomed in the near term implying further upside potential.

AUD momentum showed some signs of being topped-out on Friday but remains in positive territory. If the China credit issue gains traction, ground zero is the AUD. For the moment, the market is assuming China's credit issues can be contained.

While clearly extended CADJPY dispersion has not yet rolled over. Our signals do not yet suggest that the cyclical trend has topped out, only that it is now due for a period of price consolidation.

CADJPY momentum showing signs of rolling over but without the kind of divergence we need to really say this is a cyclical top. In our view, the jury is still out and the CADJPY may just be taking a pause.

As mentioned above the short-dated EUR option look cheap but the hourly actuals are still very weak and declining. In this environment gains on long short-dated options remains a challenge.

Above is our three-month EUR implied vs daily actuals and as you can see the gap has only widened recently. We need a capitulation wash out before our models will trigger buy signals.

In contrast to the EUR$, both the three-month USDJPY and EURJPY implied vol downtrends now look to have been broken.

MXN peso momentum ended the week well into negative territory and looks set to move still lower. A retest of the 19.80-20.00 level looks very likely. MXN vols and risk reversals are under selling pressure.

One-year MXN risk reversal is now showing up as cheap based on our models, (purple line above); while the one & three-month risk reversals have not yet re-tested their previous cyclical lows. MXN implied vols look set to re-test their major cyclical lows. The erosion in the premium for MXN puts, in the one year, shows increasingly greater confidence in the peso going forward.

The EURCHF downtrend while also extended looks set to make even further new lows.

A bottom forming in EURGBP hourly momentum?

GBPJPY dispersion also not yet rolling over. This is another sign that the yen move may not be over just yet and more likely we are just due for a pause in the uptrend.

Long term EURJPY momentum rolling over also suggests that the Yen move weaker may not yet be complete. The two key drivers for dollar-yen remain US yields and energy prices. The key 1.75 level in the 10 year remains key but for yields alone to drive the dollar-yen they will have to go far higher still. Substantially higher yields may not be in the cards, but a resumption of the rise in WTI may well be enough to prompt further yen weakness.

Last week we mentioned the yen risk reversals are often a leading indicator, and last week the yen risk reversals moved back down in line with the spot correction from 114.70 back to the mid 113 level. Our view is that the dollar rally move may not have that much further to go but what we would really need to see is either strong momentum divergence and or strong divergence between spot and the risk reversals. If the USDJPY or EURJPY were to make fresh highs but the risk reversals fail to follow suit that would be a strong indication of some kind of cyclic top in the near term. According to our models, we are not there or at least not just yet. At the same time, weakness in EURCHF, and the rise in JPY and JPY cross vol in contrast to the rest of the G-10 could be a sign of rising geopolitical tensions with China and geopolitical tension could well be another driver of the JPY in the near term.

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