Long-term implieds have begun to show signs of life over this past week, suggesting a full return could be around the bend. Though expected volatility over the coming month continued to move to a fresh record low in the past few days, the spread continues to diverge from this path. <See Full Story Below>
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EURUSD
Long-term implieds have begun to show signs of life over this past week, suggesting a full return could be around the bend. Though expected volatility over the coming month continued to move to a fresh record low in the past few days, the spread continues to diverge from this path. This indicates that expectations of a sizable run over the coming weeks time are rising. The technical picture of the EURUSD may also point to a change in market conditions. A wedge has formed in the pair offering an apex sometime next week. Should the spread break into positive territory, it could finally pull long-term implieds higher and quickly move our models reading from neutral to breakout to trend in a matter of days.
GBPUSD
Like the euro, pound implieds are trending towards a change in the market environment. Long-term vols are still trending lower with a hiccup in the past few sessions. At the same time, the spread continues to approach positive territory, which could foretell a shift from range bound action to renewed trend. This same setup was presented back in late March, just a few weeks before a break above 1.7600 resistance led to a sizable 1400 point run. Unlike the euro however, recent action was still tallying respectable daily volatility, so a breakout may not be as dramatic as the EURUSD; but, should it form, a subsequent trend could be lucrative.
USDJPY
Japanese yen implieds are offering little signal as to when a breakout from the current state of stale volatility will occur, but the technical picture suggests it could be soon. Long-term implied continue to stretch lower as the doldrums between 118 and 116 solidify. At the same time, the implieds spread continues to hover around par, suggesting traders are hesitant to place bets on a impending breakout, but are ready to follow through at a moments notice. This outlook for the short time frame is formed around consecutively higher swinglows over the past five months. With the floor behind dollar bids quickly rising, a decision around 118 may need to be made rather soon.
USDCAD
The black sheep of the group, Canadian long-term vols actually rose with the strong advance in the underlying over the past week. Typically more reactive than in other pairs, loonie long-term implieds have followed a touch of recent record lows with a sizable rebound that may suggest the market is forecasting a trend is forming. The initiation of this trend is still in doubt however. Short-term vols have not overtaken their long-term cousins (indicated by a stubbornly negative spread), a scenario that usually precedes a breakout. For a break to occur, and the implieds spread to finally roll over, a close above 1.1300 will likely be required.
USDCHF
Swiss franc implieds are much like those of the euro and sterling pairs. Long-term vols have moved to new lows as the underlying stabilizes around 1.2550. The spread is also showing a noticeably positive trend with interspersed spikes of positive reads. This is reflective of the few strong moves that have been made towards the outskirts of the 1.2200 1.2600 range that has been in place since June. With underlying spot currently posted near the top of this range, the question of whether there is a breakout or range reading for the weeks ahead from our model relies on where the USDCHF goes from here. Taking out 1.2600 in a rally higher would clearly mean a big break is underway while a move back towards the 1.2200 level would keep the range firmly in place.
AUDUSD
Aussie vols seem to be making a base while AUDUSD spot stutters on its break of the 0.7500 level this past week. Over the past two months, two ranges have been taken out (0.7700 - 0.7575 and 0.7575 - 0.7500). While this was happening, long-term implieds were leveling out while the implieds spread started to trend higher. Recently however, long-term vols have reinstituted their drop. This is likely to remain the situation unless spot can pick up steam on a move lower. Inversely, if AUDUSD starts to knock on the 0.7500 again, a breakout setup could form once again.
