30- Sept - 2022

According to our models AUD risk reversals are oversold but as you can see in the chart above the three-month still has not traded below the two previous lows, but we remain well above the extremes recorded in the Cov-19 sell-off when the 3-month AUD risk reversals exceeded 6 vols. We are not expecting that kind of sell-off but we would definitely take advantage of the skew premium to sell AUD 25 delta puts and buy 25 Delta AUD calls if you are putting on a hedge and are naturally short AUD. 

Weakness in the dollar bloc was a theme last week with the CAD ending the week at over 1.3800. Our short-term models do not yet suggest the move is going to turn down any time soon with both short and LT momentum bids.  One-month CAD implied vols are overdone both on a percentile basis and in terms of the spreads ver the actuals.  That is the only sign of excessive dollar strength.  Given the extremes in the long-dated risk reversals, one potential trade would be to sell one year 25 delta puts / but 5 deltas and then buy 12 months 25 delta CAD calls. A less directional limited loss short vol position may also look attractive; e.g a CAD call butterfly or condor trade. The weakness in CAD may well be a short-term reaction to the news that one of the largest mortgage investment corps has suspended redemptions. While the BoC is unlikely to pivot now as the USD rally is a defacto monetary easing that the BoC may need to counteract. 

Our daily dispersion indicator is both high and rising. This  bodes caution. It has not yet showed signs of rolling over.  It would be more prudent to wait a bit more to see it roll over before initiating any of the trades suggested above. 

CADJPY risk reversals are proving extremely sensitive to the spot and are now moving better bids for Yen calls faster than previous declines. This reflects renewed corporate hedging but it also is an indication that the BoJ intervention in the FX market has reduced market fears over further yen downside. The move in the CADJY skew will make Yen call spreads look more attractive vs CAD. 

At the same time long-term CADJPY momentum is showing signs of rolling over. 

More early signs that EURCHF is potentially bottoming as you can see in the hourly chart above. The spot has just closed above the hourly downtrend and dispersion remains low. A EURCHF revival should help USDCHF moved back to par. 

EURGBP vols remain at extremes despite the wild move in the spot last week. A long EURGBP condor would look attractive as a way to short vol and to a lesser extent the skew. 

With the sharp spot correction from the 9250 highs back down to 8775 the skew remained bid as you can see in the EURCHF 3-month risk reversal shown above. 

In our weekly IV/AV report GBP and GBP, crosses show up as cheap in relation to the actuals. The market is betting that the BoE intervention in the gilt market will buy the government some time and thus that the extreme volatility in GBP and GBP crosses will not persist next week until we get some clarity on the size of the BoE rate rises. 

Potential momentum divergence in our daily long-term indicator. Continues to suggest secular top in EURJPY @145. 

While GBPCAD tests the long-term trend line our discretionary sense is to fade this move, but we would be more inclined to do so only on a move back to par in the hourly momentum,  conbined with stronger technical signs of USDCAD topping price action. We doubt GBP is in a new short term trend vs CAD in the near term regardless of how cheap it looks on long term charts. 

Short term dispersion reinforces the wide IVAV spreads in GBP and further suggests a period of price consolidation, at least in the near term. GBP may have put in a short-term bottom. 

The yen is back to hugging the hourly trendline while the short-term momentum picture remains bearish.  More signs that the BoJ intervention has curbed some of the one-way yen bets. 

Yen momentum further supported by dispersion falling. We are less likely to make fresh new US dollar highs at least in the short term. 

Three-month GBP implied vol back to the previous cycle high and ends the week lower. We are less likely to see an equally sharp GBP recovery and an equally sharp vol decline as GBP faces still greater macroeconomic challenges. 

In direct contrast to GBP options, yen implieds vols  are now below the one-month vol and remain lower that the previous cycle high. More evidence of a dollar yen price exhaustion. 

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