SUMMARY
Likely to Continue to Range Trade
- EURUSD
- GBPUSD
- USDCHF
Neutral
- USDJPY
- USDCAD
- AUDUSD
Likely to Breakout
- <none>
EUR/USD
Short term volatility rose in the week and currently hovers directly below the more stagnant longer term component. As a result, the implied vol spread has narrowed once again following the temporary spike above our topside band. Suggestive of further ranging conditions in the underlying spot, the spread looks to be dipping back into neutral territory, leaving plenty of room before any breakout considerations can muster. As a result, although further downside may exist for the underlying spot, conditions will remain relatively contained.
GBP/USD
Both long and short term volatilities rose on the week. However, notably, short term volatilities rose almost 4 times long term implieds resulting in an almost zero point spread. Reflective of this is the visual plateauing currently forming in our indicator above. Additionally, the change in the spread was the most of all the majors and reflective of the deep slide witnessed in the underlying spot. Now with the differential dipping into neutral territory, similar to the euro implieds, the currency pair looks to establish a range bound trading environment. However, with pound sterling approaching support at 1.7500, near term spikes in volatility should not be completely ruled out.
USD/JPY
Long term implieds now hover below short term vols after a noticeable shift in the underlying. With short term vols rising the second most against the other majors, coupled with stagnant longer term implieds, the spread has turned incrementally higher. As a result, conditions look to remain chock full after the breakout scenario created the week before. However, notably visual, the spread differential is approaching the upside resistance band, suggestive of a shift in conditions, as the bands narrow slightly. One could infer a near term spike possibility before spot settles. Currently the currency pair resides at a pivotal point after breaking through resistance at 113.00.
USD/CHF
In similar fashion, Swiss short term volatilities rose on the week to pull within striking distance of the longer term counterpart. Long term implieds remained relatively unchanged while short terms soared. As a result, the current differential nears a zero spread and is and visually plateauing after testing our topside ceiling. Sporting the biggest spread change of all the majors, our indicator looks to be creeping into neutral territory. As a result, range bound conditions look to persist even as the currency moves higher. Notably, the underlying looks to test resistance at SFr1.3000. A break above would surely see near term vols spike and a retest of our upper band.
USD/CAN
The Canadian dollar volatilities remain unchange for the week. Short term implies rose incrementally and are now even with longer term vols offering a complete zero point spread as the differential flatlines in neutral territory. With the underlying currently hovering formidable support above 1.1700, the market may be set to witness another move as both our bands narrow, closing in on implied differential. With that said, a break below the current floor could push short terms higher and test our upper band.
AUD/USD
Bucking the overall trend, Australian dollar long term vols actually dipped in the week as short terms moved higher up. Subsequently, this created the narrower spread this week compared to last week's snapshot as our differential continues in neutral territory. The bands have additionally narrowed, suggestive of a near term spike in short term vols. Currently, with the spot hovering the 0.7750 support, penetration below the floor would contribute significantly to the aforementioned notion.
Richard Lee is a Currency Strategist at FXCM.
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