GBP dispersion remains low as you can see from the chart above we have not seen a sustained move to the high end of our range for over a year. Dispersion will remain suppressed as the spot moves in a sideways short term consolidation pattern. In our view, the longer the decline, the more dramatic and persistent will be the break out when it comes.

Our short-term GBP dispersion indicator hourly data has bottomed but as you can see in the chart above our longer-term indicator remains under pressure.

Our long term GBP momentum indicator has clearly rolled over. Short term hourly momentum is back in neutral.

The spot vol correlation is a measure we look at occasionally as it can sometimes be helpful in identifying turning points in longer-term spot trends. In our view move lower in the short term measure below the longer-term correlation may well be a sign that the top side for GBP is now limited and we are unlikely to see a move to fresh highs.

Last week we signalled the cheapness in the back end of the GBPUSD curve and how both our percentile rank and IV-AV spreads were generating long vol signals. The problem in our view is that a one-year strangle in GBP will be struck above the recent price range on the topside, and our delta hedging rule of thumb is not to hedge ahead of the strikes. Given that, a more conservative approach may well be to pay up for straddles and look to hedge the topside more aggressively. Our valuation models are neutral on direction but given the break in the LT momentum indicators and our spot vol correlation models, we remain of the view that the upside is limited. It is important to note that 12-month GBP vols have traded lower than 7% prior to Brexit, looking at all of our databases, but the probability of our revisiting those pre-Brexit lows now looks unlikely. This conclusion is also consistent with our most recent trade reports. Short-dated options have been undervalued according to our models in relation to the future distribution of prices, while longer-dated options as a rule, generally have not. The implication is that more active delta hedging is required in order to extract value from long vol position further out the curve.

While the back end of EURGBP also looks attractive, the spread vs. the actuals still is not wide enough in our view to trigger a long position. All we can say is that running short vol in this bucket would not be attractive on a risk/reward basis. The premium for EUR calls over puts has eroded steadily as the spot remains range bound and in our estimate EUR calls while not yet at an extreme, are close to our buy zone.

Above is the IV-AV spread in 12-month EURGBP implied less actuals. As you can see while the spread is below 1-stdev but still above our 2-stdev measure. It is this measure that needs to decline further in order to generate a long position in EURGBP 12-month vols.

GBPJPY is showing a similar dispersion pattern to GBPUSD low and persistently offered. USDJPY is registering dispersion lows and as a result most of the price action in GBPJPY is being driven by GBP.

Short Term IV-AV spreads widened still further from last week and we cannot recommend any long gamma positions at the moment based on these spreads. The market may well be right as clearly there is a strong expectation of rising future actual vol, but according to our models, the price is not worth paying based on the spread vs the actuals. The only place where there may be value according to our models is in one month EURGBP. Two-week MXN peso options are cheap based on percentile rankings, but here too the spread with regard to the actuals remains excessively high. Two-week vs. one month CAD still looks overpriced in our view. The market is pricing in too much price action ahead of the CDN election. Having said that however both CAD and AUD will remain under pressure and even more so if there is additional negative macro news out of China.

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.