Weekly Forex Review: 28-August-2017

Weekly Forex Review: 28-August-2017


As we suggested the AUD has not yet topped out and remains in a consolidation pattern, confirmed by the persistent decline in the hourly dispersion indicators.

Above is the same Dispersion indicator but looking at daily data rather than hourly. While below the 10percentile ranking it suggests that the consolidation pattern is still well intact. A strong indication of this pattern coming to an end will be observed first in the hourly dispersion indicators and confirmed in the daily stats. Both CAD and AUD are getting support from the general Dollar sell off that was part of the overall FX story at the end of last week. With Yellen not making any comments on monetary policy US bonds rallied and interest rate differentials became less Dollar supportive.

Finally, the commodity complex remains bid, but without any signs of an impulsive move up. Copper closed over 3$ on Friday — another strong indication that the synchronized global growth story remains intact. However, a note of caution is warranted. The discount in the front end of the copper curve to the three-month delivery is at the widest discount in four years indicating ample short term supply. Copper is also being supported by speculative positioning and less by underlying demand so the current bullish sentiment could unwind quickly. Both AUD and CAD tend to be supported by global reflation and the knock on positive implications for the commodity bloc.

The AUD risk reversals have moved higher over the week in line with the move in the spot. Using percentile rankings AUD risk reversals are now cheap, or to be more specific, AUD puts are not overpriced in relation to AUD calls across the curve. Hedge based strategies that involve buying the skew should be favored by hedgers.

CAD short term actual vols fell further and faster than we anticipated but as you can see from the chart above the two week actuals are now well under the six week. Like the AUD, CAD is getting support from the positive tone in the commodity complex, and also from the further narrowing in US-CAD bond spreads. The CAD curve moved lower with the three month IVs testing the 7% level. The next level of support in the 3M bucket is the 6% level. We continue to favour trades that are short vol, and bleed shorter C$ over time, looking for a slow correction back to 1.33 by DEC.

CAD spot vol correlation continues to move slowly higher suggesting that further sustained upside in the CAD is unlikely for now. This is also confirmed in another context but the risk reversals below.

With the C$ closing the week over 80 cents, it might have been a reasonable assumption that risk reversals would move better bid for CAD calls. That was not the case in the front end, however the one year lost a smidgen of premium for CAD puts. The market is naturally long CAD calls and this acts as a mild dampening effect on further impulsive C$ gains.

CADJPY momentum turns positive but remains weak.

Dollar Yen momentum is still in mildly negative territory. While the indicators remain mixed on balance they continue to suggest more short term Yen strength.

CHF short term actuals remain close to their highs for the year. This is reflected in the percentile rankings of short dated implied CHF vols as well.

Short term GBP actual vols are  testing the lows of the year, and while the spread between short term implied vols and actuals has narrowed it is still in positive territory (implieds>actuals). The Brexit news noted below could well give GBP a boost on Monday.

The EUR closes with a new high for the year while dispersion continues to roll over. With ST dispersion low, a quick pop to 1.20 handle now seems very likely but upward pressures are starting to abate. With Friday’s news dump from the US will encourage further flows out of the dollar the dollar in the short term.
The EUR makes a new high while short term risk reversals fail to make new highs in line with the spot. The market has covered it’s short inventory of out-of-the-money EUR calls.
GBP weakness continues to be one of the underlying themes of the FX market. EURGBP made a new high along with the EURUSD. According to news reports from the FT and the UK Guardian, the Labour Party has made a significant shift in its Brexit position, namely that Labour now supports an interim agreement keeping the UK in the single market following the March  2019 deadline. This would in effect keep the UK in the EU for a period up to 2022 while details of Britain’s divorce are finalized. This news will undoubtedly give GBP a lift when the FX market reopens on Monday.  It also indicates that Mr. Corbyn has moved considerably on this issue and that he wants to exploit the potential change in public opinion following the referendum.


Finally according to reports in the Observer the Labour Party would leave open the possibility of the UK remaining in the single market for good. Britain’s main dispute with the EU has been on the issue of regaining control over immigration, however if during the interim period the EU 27 move to harden their collective borders, Britain may well have a face saving way out from Brexit and remain a full member of the community. This idea has been put forward here previously; and is now should be considered a more probable outcome.


The MXP implied vol curve ticked up very slightly last week and some of our indicators are in the buy zone in terms of percentile rankings. For the moment, the market is ignoring Trump’s threats to shut down the government if he does not get congressional authorization for his border wall. It is unlikely that the Republicans in Congress will succumb to these kinds of threats.

If the Trump Presidency comes to an end, how it ends will really determine the impact on the financial markets. If Trump were to suddenly leave office voluntarily then the impact would be short-lived and be followed by an unwind of the dollar sell off following the French elections. If the Trump Presidency were to lead to a full-scale Constitutional crisis then the dollar downside is far greater and it will leak into the equity markets despite the strong global growth story in the background. Trump has to a large extent been mindful of the advice he has received on matters relating to foreign policy and trade issues. His actions so far have not had far reaching economic implications. However, this may well change if he starts to feel boxed in by a Congress trying asserting its authority over an increasingly unstable executive branch.

EURJPY vols are off their most recent lows. The three months printed briefly under 8% in June of this year and is now trading around 8.6. EURJPY vols have been relatively subdued because the EUR and JPY have been moving in tandem with the Dollar. Their respective correlations remain high. The EUR has been moving on the positive outcome of the French Elections, followed by increasing concern and uncertainty with respect to the Trump administration.


The market also sees Europe as the most likely candidate to end QE, with European growth outperforming the US. While at the same time, Japanese growth has only just recently started to pick up with the better than expected GDP reported on August 13th. As you can see from the chart above the EUR rally last week has not yet violated the hourly trend line and EURYEN momentum remains in negative territory.


Source: James Rider – http://bit.ly/2vBFaLl