special reports

USDCAD And USDJPY Staged For Breakout According To Implieds

Wednesday, 10 January 2007 22:38:39 GMT  |  John Kicklighter, Currency Analyst

Currency         Spot Price      Barometer Reading
EURUSD          1.2940               RANGE
GBPUSD          1.9329               RANGE
USDJPY           119.53               BREAKOUT
USDCAD         1.1766               BREAKOUT
USDCHF          1.2458               RANGE
AUDUSD         0.7765               TREND

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EURUSD
Though price action in the majors has been anything but reserved, both long and short-term implied volatility has contracted across the board. Looking to the benchmark EURUSD pairing, the long-term vols gauge (denoted by the red line) lost nearly a full percentage point in the past week. What’s more, a negative spread in the differential reveals that the shorter term outlook is settling quicker than its more distant counterpart. However, the differential is once again working its way towards a positive read, suggesting the outlook for activity is perking up. Stepping outside of the numbers, a few factors may quickly change the volatility environment. Technical levels are solidifying around 1.29 for a break or strong retracement, while retail sales and an ECB rate hike holds a modest level of event risk.




GBPUSD
Volatility in the British pound is similar to that in the euro. In the past week, underlying GBPUSD spot has taken out a considerable level of support around 1.9450; and implied volatility may have provided the perfect setup for the move. Prior to the break, long-term volatility grew a little more than half a percentage point. However, it was the strong run up in short-term vols (indicated by the surge in the spread) that signaled something was amiss. Now, spot GBPUSD is floating between major support around 1.9150 and resistance at 1.9450 leading implieds to shed little light on a potential move even though a BoE rate decision is around the corner.




USDJPY
The massive run in volatility for the Japanese yen through November has been fully wiped out. Long-term implied are once again hovering just above 6 percent annualized volatility while the spread fluctuates around par. However, looking back over the relationship between the volatility indicators and price action reveals a poor projector for moves higher. This could be a function of Japanese exports purchasing fewer options (the source of implied volatility) to hedge, since a cheaper yen naturally stokes demand. With this in mind, the technical picture may be a better forecasting device as major resistance falls at 120 and a rising trendline boosts pressure.




USDCAD
The Canadian dollar’s steady descent has been relentless, though measures of volatility have remained relatively tame throughout the move. Despite the last wave of the steady advance being the steepest since the trend change in late August, long-term implied volatility has only mustered a 0.5 percentage point advance. Instead, the real take away from volatility may be the shake up in short-term implieds. The spread between short-term and long-term vols recently dipped to -0.7 percent. Looking back over past incidences, this setup is often accompanied by a sharp turn in underlying price action. Furthermore, this time around, the proximity of convincing resistance at 1.18 and a steep rising trendline add a technical dynamic to a potential breakout in either direction.




USDCHF
In a little over six weeks, implied volatility for the Swiss franc has fluctuated between extremes. Long-term volatility has run from 6.5 percent to 9.0 percent in a little less than a week. However, while the action continues in the underlying USDCHF price action, the derived forecast of price fluctuations are once again settling to the lethargic levels seen in late October and early November. Long-term implieds recently slipped below 7 percent, even as the USDCHF move continues unabated. Conversely, an even sharper contraction in its short-term equivalent has led to cheap risk premiums and an implied spread marking relative lows.  This same situation has presented itself a number of times in the past and often develops into a breaking out (like in November) or correction (like in July).




AUDUSD
Australian dollar implied volatility is playing out much like that of the Japanese yen. The measure of long-term volatility has struggled despite the nearly 600-point advance in underlying AUDUSD spot; which, in and of itself, would suggest a solid trend is in place. However, the bullish waves in the three-month trend have produced modest increases in the long-term gauge. Looking ahead, AUDUSD technicals are already carving out a potential break lower, but neither long nor short-term implieds are jumping to confirm it.  This may suggest a decline could be perceived as merely a temporary pull-back (like those in early October and early December).

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