FxVol Weekly
11 - Mar - 2022
The chart above should be self-explanatory. The bottom line is clear evidence of a break in a very large long-term triangle formation and a further break lower to the downside would open up a lot of scope for a much larger downside move. This has not been part of our generalized narrative but that was prior to the war in Europe. While the EUR definitely looks oversold using our long-term momentum indicators, those indicators have now broken below the previous cyclical lows and this increases the ods of a more dramatic downside.
While dispersion is clearly stretched and well above the upper bound of our indicator, without any sign of a turn in the long-term dispersion the existing trend lower will continue.
A similar conclusion looks at the hourly dispersion chart with only the slightest sign of a pause. We would not consider a counter-trend short vol trade unless both the daily and hourly dispersion indicators roll over.
Clear signs of momentum being stretched for sure but our indicator has now taken out the previous cyclical low. The only comment we would add to this technical backdrop is that a further sharp deterioration in the value of the EUR which may now be highly likely given the effects of energy sanctions, the ECB may now be more willing to move to a tighter monetary policy sooner than expected simply because a persistently weak EUR is a defacto easing of monetary conditions.
Is CADJPY now the perfect set-up to take out the previous cyclical highs around 93? The CAD rallied sharply on Friday following the CAD employment report. The macro commentators were largely blown away both by the raw numbers and the reduction in the unemployment rate. The spot did rally to just under 1.27 only giving back a good portion of those gains by the close. The employment gains certainly cement the next 25bp move in short-term interest rates and may kindle talk of a 50bp move. But having said that, the key driver of the CAD exchange rate is global growth combined with rising commodity prices. Higher short-term interest rates alone will not be enough. At the same time, the outlook for global growth is deteriorating and was showing signs of faltering even before the war in Ukraine.
Yen hourly dispersion combined with the clear break of the previous top at 116.35 does suggest a further topside move in the yen. The next topside resistance is in the 118.55 area which is now probable. Having said that we are skeptical of this being a sustainable long-term trend for two reasons. First, we need to see a complete breakdown in long-term US gov bond yields. The ten-year traded up to 2.00 at the end of the week but closed a tad lower by Friday. We are going to need to see the 10-year break of 2.25 to give us an indicator of a larger more dramatic breakdown in US bonds. Secondly, while CAD and AUD are supported by the broad rise in commodity prices, and those gains should continue to support both FX pairs, they will not be sustainable if the world enters a global recession. The bottom line is that the upside for CADJPY is supported in the near term but it is unlikely to be sustainable over the medium term and the correction when it comes will be sharp.
No sign of any turn in our longer-term EUJPY momentum indicator. We continue to see some value in selling EURJPY call spreads on a further bounce back to 130 level - e.g. sell 3M 40 Delta EUR Call buy 25 delta EUR call for a $-credit.
While the outlook for CAD vs the US dollar is less clear the odds of CAD making further gains vs. the EUR remain high.
Hourly dispersion while high continues to support further CAD gains. Here too we would not be inclined to put on a counter-trend + short vol trade unless both hourly and daily dispersion indicators rollover.
At the same time, we need to see a turn in the rising actual vol trend to support any short vol + limited loss short vol trade.
The first early signs of stabilization in EURCHF combined with the more generalized dollar rally should be enough to get USDCHF to test 9450. As you can see from the daily chart above USDCHF has finally broken out of the top-end of the triangle formation shown above.
GBPUSD is also in line with the signals we are getting from the EUR dispersion. GBP remains under pressure in the near term. No sign yet of any turn in our hourly dispersion indicator and it supports the downside narrative.
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Research Director
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