Weekly FX Review – June 9, 2017

Weekly FX Review – June 9, 2017

FxVol Research Weekly

Weekly FX Review
9 June – 2017
Faster than anticipated, the market has already started to sell off the front end of the MXP risk reversal curve with the sharp decline in the one month and three-month periods. MXP puts are losing some of their premia primarily in the front end. The Peso spot also showed very clear signs of breaking out just below the sideways channel formation. The one-year risk reversals, by contrast, remain bid at around 2.5vols over for US$ calls. 
The short takeaway from the UK election is that GBP gamma should not be shorted. As you can see from the chart above the actuals have consistently been under the 

 following the referendum. This is not just the one-off effect of the sharp GBP decline following the referendum result but has remained persistent. Typically, the price action has been slow GBP rallies with corrective declining vol with sharp short-term sell-offs with rising vol. That is the way to manage the deltas in a dynamic hedging fashion. It is very likely to persist as the EU negotiations begin in earnest. The initial Brexit talks are unlikely to go well. The EU 27 know they are dealing with a government that is passed its sell by date. While the prospect of a much softer Brexit is real, the timing is now much longer than expected as the dust has far from settled on Britains political uncertainty. The probability of another UK election before year-end  is high.  

Three-month EUR vol is trying to take out the lower bound in the channel in the chart above. EUR options are cheap but vulnerable to further declines. The dealers are likely long options from dealing with the corporate sector and they are likely to be comfortable at these levels staying long. Often their response is to hedge by selling the front end of the curve. So it is likely the EUR curve will steepen further. Short term EUR options will start to look attractive. Bear in mind that two-week actuals look set to retest the lows of around 6%. Two-week EUR implied closed Friday at just over 6.6%. The only part of the risk reversal curve where there is any significant premium is in the one year, while the 1m and 3m areas are close to flat.  The one-year risk reversal to is likely to be sold off in the final last leg down in vol. This would be a good sign that the washout is nearly complete. 

The rolling over in the six weeks STDEV suggests further EUR gains in the short term at least 

 challenged.  This is also evident in the EURCAD momentum chart. Long 1-month EUR put condors may not be a bad idea here, ie. buy the 1.12 sell the 1.10 & 1.08  and buy the 1.06 strikes (all EUR Puts).

Following the UK election EUR calls lost some of their premia in the one month but remained more or less unchanged further out the curve. 


EURGBP needs to close above the key 88.20 area to suggest a renewed move lower in the pound. Notice at the same time the six-week STDEV is low so the probability of trending price action is good.  

I was able to get a hold of a Canada productivity chart that was mentioned last week. Just to reiterate: the FX market is unlikely to pay much attention of productivity in the short term but if this trend were to persist over the medium term it would translate into a stronger C$. Fridays CDN employment report continued the string of better than expected releases and the fixed income markets are starting to move forward their expectations of the BoC moving to a less accommodative stance. A move back to the 75cent or 1.3333 level looks likely particularly in the context of CAD vol remaining under pressure. 

The EURCAD updated hourly momentum still showing clear signs of divergence.

The Vortex indicator using hourly data has gone long CAD short Yen. If true, the implication suggests that 10YR US yields may have bottomed in the near term as Dollar-yen is so highly correlated to the US yields.
The Vortex Indicator is an oscillating momentum indicator that helps define the short-term trend. Increase or decrease the number periods used in the calculation to get more or fewer trading signals. When +VI is above -VI it helps identify the uptrend, and when -VI is above +VI, it helps identify the downtrend.  Since we are using it with hourly data the risk is being whipsawed in a choppy market. Vortex is best employed in conjunction with other short-term indicators. With Vortex, the speed of the signal generation is very much a function of the length of the of data strips used.  Longer periods will make for slower signals and shorter will increase the signal frequency. 


Above is one month CAD implied less actual spreads; and as you can see they have turned negative.

The Vortex is also suggesting the AUD is

in spite of the strong Aussie GDP data from last week.



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Best Regards, 
James Rider
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