Majors Move To Neutral Ahead Of FOMC Decision

Published June 29th, 2006 - 02:00 GMT

Currency<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Spot Price

Implied Spread

Weekly Difference

Barometer <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Reading

EURUSD

1.2529

1.001

0.425

NEUTRAL

GBPUSD

1.8167

0.826

0.263

NEUTRAL

USDJPY

116.34

1.823

0.234

NEUTRAL

USDCHF

1.2477

1.265

0.372

NEUTRAL

USDCAD

1.1252

1.391

5.510

NEUTRAL

AUDUSD

0.7284

2.877

4.876

NEUTRAL

 

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EURUSD <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Recent market action has completely skewed the readings of our Range-Breakout barometer for the week. Though this is perhaps troubling to those who attempt to use the raw numbers as an end-all guide to market volatility, more discretionary analysis can guide us through these aberrations. Looking at the weekly change in implied volatility spread, one might guess that the EURUSD is showing a clear range-bound signal. Given recent sideways price action and a large spike in Implied Volatility ahead of tomorrows FOMC rate decision, Actual volatility is a now well above Implied vols. Regardless, it seems unreasonable to claim that markets will remain range-bound through the coming days of important data releases. As a result, we think it is most accurate to say that our barometer predicts neutral market action.

 

GBPUSD

Price action in the pound has recently quieted after the currency dropped over 400 points last week. Given this, our measure of historical volatility fell by a large margin across the week. Coupled with significantly higher implied volatility ahead of tomorrows US Fed rate hike decision, the vols spread has jumped 0.8 percentage point since our last report. Now above its upper band, such a reading suggests that we should expect further range trading in the coming days. Common sense tells us, however, that we should brace for potentially large moves following tomorrows much-anticipated <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US interest rate announcement. Given these countervailing forces, it seems most fair to predict a neutral bias in our forward-looking volatility predictor.

 

 USDJPY

Volatilities differentials on the Japanese Yen breached their upper band on a sharp rise in Implied vols. By the strict parameters of our model, this suggests that the USDJPY is to remain relatively motionless in the near-term. This contradicts intuition from underlying fundamental forces, however, as the potential for BoJ Governor Fukuis resignation threatens to derail the Yen. Likewise, any surprises in the coming days of Economic data could further shake the currency. We maintain that there exists a neutral-to-breakout bias on the USDJPY currency pair. 

 

USDCHF

As is custom, price movements in the Swissie have nearly mirrored those in the Euro. Thus following a lull in actual volatility, our indicator breached its upper band to warn of slow price action within the coming week. Such a prediction may be short-sighted, however, as recent sideways trading simply reflects market hesitation ahead of key announcements on US interest rates and inflation. As with its highly negatively correlated European cousin, we think that there exists a neutral-to-breakout bias in the USDCHF currency pair

 

 USDCAD

In last weeks report, our range-trend barometer predicted a breakout in the USDCAD currency. Interestingly, a large swing higher tested very stiff resistance at the C$1.1260 level, but a sharp reversal gave clear signal that the currency pair was to stay within its two-month trading range. Price action subsequently remained subdued as traders paused to catch their breath ahead of this weeks fundamental releases. Given these influences, we saw the implied volatilities spread soar 5.5 percentage points higher to 1.4%.  Though the spread now rests above its upper band, we hesitate to label this reading a clear sign of range-trading to come. As with other currencies, we must prepare for potentially large swings following tomorrow and Fridays news releases.

 

AUDUSD

As if almost in sync with the USDCAD, the AUDUSD implied volatilities spread jumped 4.9 percentage points to reach 2.5% on the week. With the largest spread of any of the previously covered currencies, the Aussie dollar looks to trade within a range in the coming days. This forecast comes with a caveat, however, as any major dollar rally or sell-off following tomorrows data could certainly move the Australian dollar beyond this past weeks trading range. Also worth noting, the last time that the AUDUSD implied spread reach such high levels, it subsequently tested its 200-day SMA in the spot markets but quickly reversed. Weighing the potential for further sideways action against that of a breakout, it is most accurate to say that the range-trend forecast shows a neutral reading.

 

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