Euro and Yen Set For Breakouts, Canadian Dollar Likely To Range

Euro implied vols continued to head lower, unreflective of the action seen over the course of the week. Notably, the currency pair has advanced to take out the 1.3665 high set back in the tail end of 2004, evoking further momentum and subsequent expectations for higher levels.
Click here for PDF Version

[B]EURUSD[/B]
[B]
[/B]
Euro implied vols continued to head lower, unreflective of the action seen over the course of the week. Notably, the currency pair has advanced to take out the 1.3665 high set back in the tail end of 2004, evoking further momentum and subsequent expectations for higher levels. Comparatively, however, implieds have moved lower to test record lows in the longer term. Dipping through the 6% figure, the euro long term implied is now trading at 5.45 percent, with short terms incrementally higher. The slight uptick in the short term has incidentally kept the spread at the zero line. Ultimately, with both measures in a lull, suggestions loom of a near term breakout surrounding the 1.3700 figure.

[B]GBPUSD[/B]
[B]
[/B]
Sterling vols subsequently were cellar dwellers during the week, dropping below the 6% level. Now, with the longer term priced in at 5.9%, volatilities are fully reflective of the consolidation that has been taking place since the reach above the 2.0000 figure. Subsequently, the current conditions have forced the narrowing of the spread, as the short-long differential drops to -40 basis points, a slightly improvement from the prior week. Conditions are also likely to remain as the schedule next week is devoid of any real consideration leading up to the Bank of England announcement the week after. Nonetheless, conditions are setting up nicely for a burst of activity with the last time we were at these levels, the pound found support at 1.9300, taking the currency higher.

[B]USDJPY[/B]
[B]
[/B]
Japanese yen vols continue to move lower, suggestive of a more range bound scenario in the underlying currency. However, given the acceleration in the decline of the longer term component and the support in the short-long differential, the current situation may be jeopardized to a more volatile environment. Longer terms are priced at 7.25 percent with the spread trading 15 basis points wide. Taking a look at the price action, the 120 level stands as the near term key to volatility. With the USDJPY set to break or fail, action is in the cards for implieds.

[B]USDCAD[/B]
[B]
[/B]
Rising steadily through the week, Canadian dollar vols are paring back some as the underlying spot currency finds technical support. Now consolidating just above the 1.1200 figure, the currency pair is set for some near term ranging, confirmed by our volatility measure. The short-long differential is approaching a statistical top, trading 32 basis points wide, with the longer term measure turning lower to 5.98 percent. Should the current support figure fail to hold, the impending drop will help inject further life into volatility measures. However, with little on the calendar and market forces steady on the recent downturn, the likelihood of such a scenario remain thin, for now.

[B]USDCHF[/B]
[B]
[/B]
Although short term implieds ticked higher throughout the week, the longer term picture is one that is reflective of further consolidation in the currency spot. The longer term component is priced at 6.65% with the short-long differential narrowing to a mere negative 5 basis points. With consolidation likely to continue, albeit in the short term, the signals continue to purport a range bound scenario for the USDCHF currency pair. However, the stability of this notion could be put to the test given the handful of US data set for early next week.

[B]AUDUSD[/B]
[B]
[/B]
Following the record climb by the underlying spot, implieds vols have trailed back a bit as the AUDUSD consolidated over the past week. Incidentally, short term components have also pared back, leading the differential comparably lower than levels at the beginning of the month. Longer term vols are priced at 7.7% with the short-long differential trading 30 basis points wide. Ultimately, the picture resembles a range bound environment, with the spot likely to continue consolidating. However, one caveat remains and that is activity in the AUDJPY cross pair. With plenty of carry trade volatility expected, the spill over may boost a return to 8% plus levels in the underlying spot.