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Currency Volatility: EUR/USD and AUD/JPY in Focus

Currency Volatility: EUR/USD and AUD/JPY in Focus

Rich Dvorak, Analyst
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CURRENCY VOLATILITY – TALKING POINTS

Currency volatility is expected to be relatively muted next week according to implied volatility measures derived from 1-week forex option contracts. In fact, DXY US Dollar Index 1-week implied volatility of 5.32 percent is the fourth lowest reading on a Friday all year. This is quite surprising considering the latest flareup in risk trends with Brexit talks stalling, the reignition of the US China trade war, and intensifying speculation surrounding global monetary policy.

DXY US DOLLAR INDEX 1-WEEK IMPLIED VOLATILITY

DXY US Dollar Price Chart

USD currency volatility appears to be trending higher, however, and forex price action has potential to receive a jolt from the Fed minutes due Wednesday at 18:00 GMT which will detail the April 30 – May 1 FOMC meeting. Market participants will likely parse the text for additional insight on the US central bank’s relatively hawkish or dovish leaning which will likely be reflected by overnight indexed swaps pricing.

The futures market is currently putting a 47.3 percent probability on the Fed cutting its policy interest rate by its September meeting, which is up from 31.7 percent last Friday.

CURRENCY VOLATILITY & TRADING RANGES (OPTIONS IMPLIED)

Although, prior to the FOMC minutes release, it will be important to keep tabs on ECB President Mario Draghi who give a speech in Frankfurt at 7:00 GMT Wednesday on Eurozone economic developments and monetary policy. As such, EUR/USD will be particularly interesting to watch next week.

EUR/USD PRICE CHART & TRADER SENTIMENT

EURUSD Price Chart

According to IG client positioning data, 55.1 percent of EUR/USD traders are net-long with the ratio of longs to shorts at 1.23 to 1 headed into the weekend. In addition, the number of traders net long is 15.2 percent higher compared to last Friday.

As risk trends appear to be resurfacing, AUD/JPY will be another currency pair worth watching next. With the recent shift lower in AUD/JPY price action, relatively risky currencies have generally been underperforming their safe-haven counterparts.

This has led to the unwinding of the carry trade which has put additional downward pressure on spot AUD/JPY. Escalating risks stemming from the US China trade war threatens more downside in the AUD/JPY as market uncertainty – and volatility – looks to keep Japanese Yen bulls in charge of price action.

Furthermore, the risk that a possible RBA rate cut could be hinted at by Governor Lowe who is set to speak in Brisbane on Tuesday at 2:15 GMT also threatens AUD/JPY next week. Also, the OECD is expected to publish its updated Global Economic Outlook report later on Tuesday at 9:00 GMT which has the potential to weigh heavily on the market’s overall appetite for risk.

AUD/JPY PRICE CHART & TRADER SENTIMENT

AUDJPY Price Chart

AUD/JPY client positioning data from IG indicates that a staggering 80.2 percent of traders remain net-long resulting in a long-to-short ratio of 4.05 to 1. Moreover, the number of traders net-long is 26.6 percent higher compared to last week.

Taking a contrarian view on this trader sentiment data, spot AUD/JPY may continue to fall. That being said, with 1-week implied volatility of 9.68 percent, AUD/JPY traders might expect spot prices to gyrate between 74.755 and 76.469 over the next 5 trading days with a 68 percent statistical probability.

- Written by Rich Dvorak, Junior Analyst for DailyFX

- Follow @RichDvorakFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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