Three-month yen vols are finally rising on the break in the support at the bottom end of the triangle. The appreciation of the yen was characterized last week as a knee-jerk reaction to the Korean crisis. However, the move in the yen is more likely a derivative of the rally in US bonds following the weaker than expected inflation report.

If the FX market really was of the view that a hot war was imminent the Yen would not be a likely candidate for appreciation, nor would the KRW or many of the Asian main currency pairs. Having said that the rise in Yen vol is the first sign that the Yen is likely to break out its sideways consolidation pattern. The more likely trigger for a sustained appreciation of the Yen would be a renewed outbreak of risk aversion.

Continued volatility and political uncertainty generated by the current US administration would be the most probable cause. Yen risk reversals both vs. the dollar and the major crosses moved smartly better bid for out of the money Yen calls, however as you easily see from the chart above, the premiums for at-the-money options remain historically cheap.

AUD dispersion has rolled over and that implies a period of sideways consolidation going forward with a higher probability of a weaker trend developing. Having said that however it is hard to see the Dollar bloc really selling off unless we see a credible break down in the commodity complex.

AUD momentum moves into negative territory but it is still to early to call for a major secular turn in the currency.

Very strong demand for AUD puts over calls accelerates with only a minor break down in the spot.

Three month CAD implied vols rise and the spread between implied and actual widens.

Short term CAD actuals are topping, but have not yet broken down decisively. When they do it will confirm that the CAD is back into a consolidation pattern. CAD risk reversal ended the week largely unchanged with the premiums holding stable for CAD puts over calls.

As we pointed out last week with early signs of momentum divergence CADYEN is correcting lower but with declining volatility. Yen strength was a consistent theme across all of the major crosses last week.

CADYEN follows USDJPY vols higher on the week while GBPCAD and EURCAD remain more subdued by comparison with the latter holding just under the 9% level.

The CHF is still holding below the trend line (see above) despite the short lived $ rally. CHF vols still trending higher and the spread with the actuals is widening. It may not be dramatic but slowly volatility in the major currency pairs is rising.

Short term CHF actuals remains at their highs for the year and short dated CHF options are no longer cheap.

EURCAD is holding on to its hourly trend line while dispersion remains relatively low. Short term dispersion turns lower suggesting declining ranges.

EURCAD risk reversals all holding on to premiums for EUR calls over EUR puts. The three month period saw the largest move on the week.

EURCHF losing most of its top side momentum, but the US-Korean conflict not precipitating the kind of move in the CHF one would normally expect in a real crisis. The CHF rally can just as easily be described as a correction from overbought levels rather than as a risk aversion move.

One month USDCHF risk reversals flip from being bid for USCalls to bid for US puts.

Signs of a top? EUR risk reversals also ended the week flat which implies that most of the street has covered their inventory of out-of-the-money EUR calls. The roll over in the dispersion indicator is often an early sign of consolidation to follow with a higher probability of a larger correction developing.

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The EUR may need a larger correction back to 1.15 before making a more determined assault on the 1.20 level.

EURGBP remains in a choppy uptrend with the spot now close to taking out significant topside resistance (see chart below).

Long term EURGBP momentum remains in positive territory and well below cyclical lows. This suggests that we are still well away from a major cyclical top.

Continuing with the theme of a stronger yen this week, EURJPY momentum divergence, that we noted last week, has now developed into outright negative momentum readings. The hourly trend line has also been taken out.

The hourly trend line in the EUR remains intact however the topside momentum is faltering. The EUR needs either a period of consolidation or a modest correction to abate some of the extreme technical readings.

Another sign of a near term EUR top? EUR risk reversals are coming off their recent cyclical high with the one and three-month readings back nearly to par.

GBP is holding its daily trend line, but it has given up the hourly trend line. GBP weakness is an underlying theme in the forex markets. At the moment it is more pronounced against the main crosses but it may well find expression vs the dollar.

The except to the weak GBP story is vs CAD but even here the short term story for GBPCAD looks less like GBP upside and more a case of consolidation as both ST and LT dispersion readings are declining.

GBPJPY is threatening to take out the bottom end of the wedge formation.

The Yen has taken out the daily trend line above and dispersion is rising. Notice that previous rises in the dispersion were followed by renewed broad consolidation. The balance of risk is still in the direction of renewed trending price and further move lower in USD-JPY.

This is the same chart using hourly data. Dispersion readings are rising but notice ST is still subdued. That will change on another move lower. If the ST breaks over the LT it will increase the odds of a sustained trend developing.

The USDollar counter-trend rally vs the MEX may well be topping out. One year MEX risk reversal has started to stabilize while the three month has moved higher narrowing the gap and the spread we commented on last week.

Previous Weekly FX Review

Best Regards,
James Rider

Director,
FxVolResearch  Ltd.

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