FxVol Weekly
17 - June - 2022
CAD long-term momentum is topping while the spot is revisiting the previous cycle high. The options market is very short out of the money CAD puts and both implied vols moved up in line with the spot. While last week saw weakness in WTI and the commodity complex in general, we do not yet have sufficient evidence of a secular reversal in commodities that would be enough to justify a further sustained move lower in those FX pairs that have the highest sensitivity to global growth e.g. CAD and AUD. To get to that point we would also need evidence that the BoC and the RBA are going to slow down their monetary tightening relative to the Fed. This may well be a story for later in the year but the current moves in CAD and AUD look overdone.
Twelve-month CAD implied vol is just about back to the previous cycle high and nearly the previous spread vs the actuals.
The chart above is the one-year USDCAD risk reversal skew, now over 2 vols bid over for 25 delta CAD puts (USD calls). The risk reversal skew in USDCAD is back to the previous cycle high. Short CAD long USD positions are better expressed vs USD Call (CAD put) spreads.
The near-term spreads that show up as attractive are in our view two weeks vs 1Month spreads. This is particularly the case in EURCHF (shown above), but also in GBPUSD and USDCHF.
The chart above is two-week vs 1-month GBPUSD implied vol.
The chart above is two-week vs 1-month USDCHF implied volatility.
Potential double top in USDCAD and momentum is not quiet making a fresh high.
Short and long-term GBP momentum remain in negative territory. A two-week vs one-month short-dated calendar should be constructed using out of the money GBP puts.
GBP is in a choppy depreciation vs the EUR but holding on to the hourly trend line. Given the rise in the skew in favour of EUR calls we would be more inclined to express directionally long EUR positions via EUR calls spreads.
EURJPY dispersion is showing signs of rolling over implying that the move up is losing some steam. Further evidence would be seen if we break the hourly trend line shown above.
More early signs of yen momentum divergence. We have been here before. The implied vol market is extremely bid and the market makers do not want to let inventory go easily. If the BoJ were to relent and let the JGB market "go" the move is likely to be swift. Having said that the BoJ has the firepower to keep buying Japanese bonds. The key is then inflation. Once the market gets the slightest sense of that the market should turn violently.
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