FxVol Weekly
04 - Feb - 2022
The front end of the EURCHF curve is showing up as a sell from one week out to one month. Of these periods the two-week and one-month periods are the most overvalued. Two strategies come to mind. A directionally neutral butterfly spread, or a condor trade that has some embedded directional bias on initiation. Both are worthy of consideration.
LT momentum is showing the first tentative signs of turning. ST momentum using hourly data looks stretched. Our conclusion is that while the LT trend may well be in the process of shifting, the spot will need time to consolidate before moving higher. This is especially true given the backdrop of the stand off with Russia over Ukraine as that crisis is far from being fully played out.
The two-week dispersion is at its previous cyclical high. Not to say it cannot go higher but the odds of a correction are good. We may indeed be at an important turning point for EURCHF and that will give USDCHF the chance to trend materially higher, but it is still early days.
We can see in the daily USDCHF chart the clear longer term triangle formation. Our view is that when and if it breaks out either way it will trigger a sustained move in USDCHF and our guess is that this move is up.
This is the same pattern using the daily dispersion indicator, but here we can see daily dispersion rising from a low level and that increases the odds of USDCHF breaking the triangle formation.
While not yet at a sell signal we are close in one-year USDCAD. As you can see one of the reasons for the sale is that we are approaching the previous cyclical highs while IV/AV spreads are widening. Again we are presented with either a directionally neutral butterfly or a condor trade using either puts or calls.
While not the most reliable indicator, the one-month AUD spot vol correlation is moving lower and indicates real market fear of a break of the previous cyclical low.
If AUD vols were cheaper we would be inclined to own two-month AUD strangles given the low readings in the daily dispersion indicator shown above. But the premiums are not sufficiently cheap at the moment.
Clearly, CADJPY continues to show momentum divergence. The hourly chart shows a clear triangle formation.
Dispersion also suggests we are near a break in the consolidation pattern.
Hourly dispersion however continues to fall, suggesting that it may prove prudent to wait just a bit longer.
The sharp EUR rally following the ECB press conference last week has not yet turned LT momentum, but, as we pointed out last week LT momentum was already stretched ahead of last weeks rebound. It is likely the sharp move up in the EUR was more the result of the excessive market long USD positioning. This may be a correction that provides a pause before the USD rally continues.
A similar picture with respect to GBP/JPY compared to CADJPY and in our view a similar opportunity presents itself here.
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Research Director
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