FxVolWeekly
10 - Dec - 2021
Short-Dated IV/AV Spreads
With key inflation releases, next week along with the Fed press conference the one week and two week periods remain well bid. This presents both one vs. two weeks and two-week vs one month spreads as potentially attractive trades. EURGBP stands out as you can see in the chart above in terms of the spread vs the actuals and here too two-week vs one month may well be a good trade. The market tends to sell off implied vols in the period just before Xmas up to the New Year. However at the same time, it is not at all unusual for the FX market to get thin with declining liquidity spot moves that can be exaggerated, so it is more often the case that short term options become oversold.
Even though EURCAD short-dated actuals are in line with the implied vols with declining dispersion and failure to make new lows the market continues to show signs of a EURCAD bottom. One discretionary trade that we have been toying with is either a EURCAD butterfly using EUR calls CAD puts or a EURCAD condor. At the same time, the two-week EURCAD implied vol, while not at an extreme as defined by our indicators is nevertheless quite close. A limited loss short vol two-week or two-week vs. one month trade is worthy of consideration.
With our LT dispersion indicator now clearly rolling over it looks very much like the rally in the CHF vs. the EUR is close to an end or at the very least due for a sideways price consolidation. A break of the downtrend shown in the chart above would confirm. The fundamentals that would support a reversal would clearly be additional confirmation that the Omnicom variant is likely to become the dominant strain and that is truly less serious. The second fundamental would be a lessening of the tensions between Putin and Ukraine.
While the EURCHF risk reversal curve is still at a premium for CHF calls over as you can see by the end of the week the premium declined as EURCHF corrected marginally. The is at the least a good sign that the options market is becoming less worried about the EURCHF downside.
EUR daily dispersion continues to roll over suggesting at the least that the dollar rally is due for a pause. One & three-month EUR risk reversals moved better bid for EUR calls, but the one-year hardly moved on the week.
More early signs using LT daily momentum that EURGBP could well be close to an important cyclical low. Given the wide swath of central banks decisions next week, the most uncertain and the least known unknown would be the BoE. Given the failure to make good on earlier promises to tighten the Bank of England could well be least likely to give the market clear messages at this point. The Fed has more or less raised its colours to the mast of starting the tightening process, and the BoC has effectively stopped bond purchases. The BoC will likely change their tune only if the CAD dollar were to rise sharply back above 83 cents and that outcome gives the price action looks increasingly unlikely. The persistent dovishness of the ECB is generating concerns within the bloc, most notably in Germany. It is hard to see how the ECB can get any more dovish and if anything the risks would be a tightening in the rhetoric. So far that has not happened and it will need to happen before we are going to see a meaningful turn in the EUR. With regard to the UK, there is also the deteriorating position of Boris Johnson and the real possibility of an earlier end to his tenure at No 10. Would his departure have a meaningful impact on GBP? It might but only in the very short term with the political uncertainty adding to the Omincrom variant. These two factors may be enough to delay the start of any BoE tightening cycle.
As you can see in the chart above the one-month EURGBP risk reversal is well off its lows and the most recent leg down in the spot did not trigger a new risk reversal low. We take this as potentially another sign that the spot has found a bottom, and more obviously the option based hedging is being driven by renewed GBP weakness concerns.
The EUR needs to break the hourly triangle formation to suggest further upside. Our indicators are only suggesting price consolidation in the near term. A move in hourly momentum back to par (we are close now as you can see in the chart) may be a good place to re-establish shorts.
EURJPY hourly dispersion is also suggesting that the move lower in the spot is close to near term exhaustion. We may well consolidate between now and the end of the year.
MXN short-term momentum is falling fast and the implied vol curve along with the MXN risk reversal are declining (lower premiums for MEX puts)
As you can see in the chart above the MXN peso risk reversal curve while certainly lower is not yet back to the previous cyclical lows. We need a break in the spot below 20 in order to clear the way for much lower MXN vols and further declines in the premiums for MXN puts.
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Research Director