SUMMARY

Likely to Continue to Range Trade

-    EURUSD
-    GBPUSD
-    USDCHF

Neutral

-    USDJPY
-    USDCAD
-    AUDUSD

Likely to Breakout

-    <none>

EUR/USD - Neutral for the previous week, implied differentials rose again and tested our upper boundary, suggestive of further range bound activity.  The underlying, as a result, looks to be further contained by range support and resistance in the near term, rising nonetheless.  Short term vols rose only slightly in the week, with an even more incremental increase in longer term vols, leading to the retest, which in hindsight was imminent compared to last week.  However, with the bands slightly widening, notions of a short term break look to be growing.  Ultimately, a confirmed drop in implieds is necessary before this theory should be considered.  In any case, a break below 1.2200 and above 1.2600 would lend further to the notion.

GBP/USD - Implied vol differentials narrowed in the week for the British pound, with short term vols pushing the overall differential above our upper band, suggestive of a range bound environment.  Similar to its euro currency counterpart, cable differentials looks to be dipping back into neutral territory where it hovered last week.  Subsequently, the underlying spot rate is contained in an upper and lower range channel with a break above 1.8500 and below 1.7800 as confirmation of a breakout in either direction.  Additionally, with widening bands, confirmation would need to arrive from a precipitous dip in implieds.  Notably, short term vols for the currency rose the most of all the majors for the week.

USD/JPY - As mentioned in the previous week, Japanese yen implied differentials continued to peek above the upper resistance band, suggesting further range bound momentum in the underlying currency.  Now dipping below into neutral territory, volatilities remain relatively unchanged for the currency as short term vols actually declined in line with the longer term, hovering marginally above.  Additionally confirming the staid trading environment looks to be a slight narrowing of the bands.  Currently, the underlying now trades off of a bounce of the support at109 as we approach the September 11th elections.

USD/CHF - Reflective of euro zone currency action, Swiss franc vols, rose above the upper band, furthering the overall notion of a range bound trade as the underlying currency remains contained.  However, similar to both the Euro and British Pound, one cannot ignore the potential breakout potential with the bands widening slightly.  In addition, short term vols rose the second largest amount of all the majors with an incremental rise the longer term.  Nonetheless, short term implieds still remain hovering longer term vols, if only marginally as the spread widened.  Bouncing off of support at 1.2300, the underlying looks to be approaching channel resistance at 1.2700.

USD/CAD - Continuing in the neutral zone as the underlying steadily gains strength, implied differentials looked to be retracing after signaling the downside breakout last week.  However,  staid range environment potential looms as the vol spread rises to the upper band in addition to slightly narrowed signal bands.  The overall spread remains relatively unchanged as short term vols rose in line with longer term implieds, with the longer term looking to catch up.  Long term vols rose the most of all the majors signaling drawn out interests.  Looking to form a bottom currently, a breakout scenario remains possible as the spread looks to be flirting with the bottom band.  Near term breakouts look to take advantage of support at 1.1800.

AUD/USD - Continuing the previous range bound scenario, vol differentials retested the upper band in the past week.  Dipping into neutral territory again, the overall spread looked to widen in favor of long terms, as short term vols declined enormously.  Longer term vols slipped only incrementally.  As a result, long term implieds now hover above the short term, indicative of waning activity in the short term, and furthering the stay of the current environment.  Signal bands also confirm the notion as they remain directionless at the current time.

Richard Lee is a Currency Strategist at FXCM.