Consolidating over the past week, the rather steady price action has led to an incremental downturn in the longer term implied measure. Previously higher at 5.65 percent, the implieds have dipped to 5.30 percent for the week, subsequently in line with the spread?s action.
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Consolidating over the past week, the rather steady price action has led to an incremental downturn in the longer term implied measure. Previously higher at 5.65 percent, the implieds have dipped to 5.30 percent for the week, subsequently in line with the spread?s action. Incidentally, the differential has turned surprisingly lower compared to last week?s positive reading of 5 basis points above the zero line. As a result, this week?s reading may be signaling a temporary top in the EURUSD, although longer term implications are looking for continuation according to our model.
[B]Event Risk: Durable Goods Orders[/B]
Sterling implieds moved in sync with Euro implieds, falling slightly as the price action temporarily consolidated over the course of the week. However, the difference here is the fact that the pound continues higher, helping to mitigate what would be a noticeable decline in the model?s action. Subsequently, this sets up the key 2.0550 figure as the next resistance in market focus. A break above would likely spur vols even higher in both the longer term and differential. Incidentally, even with the spread and longer term measure remaining relatively unchanged on the week, a spike higher would be a result of the upcoming retail sales report.
[B] Event Risk: UK Retail Sales[/B]
The case was the same for Japanese yen vols which pared back only slightly even as the price action turned lower from the 124.00 figure. A trend continuation in the implied picture remains viewed even as the model?s components pulled back slightly. For the week, long terms have pulled back to 7.20 percent with the spread falling through the zero line, currently down 8 basis points. For the upcoming week, economic data remains thin, likely boosting the notion of a short term continuation as the next event risk is presented in the national trade balance report.
[B]Event Risk: Trade Balance[/B]
The Canadian dollar continues to appreciate against the US dollar, however at a slower pace than previously witnessed. Both components ticked slightly higher in the week, with the longer term currently priced at 7.7 percent and the short-long differential rising above the zero line at 20 basis points. The improvement is well received considering last week?s under 35 basis point print. Subsequently, although model suggestions remain in range bound indication, the condition will likely be changed as the market heads into the Canadian retail sales report. The event risk for next week, the survey is likely to increase the action surrounding the impending 1.0400 figure in the short term.
[B]Event Risk: Canadian Retail Sales[/B]
Following the trend of dollar bearishness, Australian dollar strength helped to kick implieds slightly higher during the week. Previously at 7.75 percent, longer term implieds are now priced at 8.075 percent with the short-long spread dipping considerably to 8 basis points above the zero line. Indicative of lower short term implieds, the model?s suggestions points towards a trend continuation on last week?s break of resistance. The notion puts the 0.8783 and 0.8800 figures in play with a break above likely to inject further volatility into the pair.
[B]Event Risk: Producer Price Index
Implied volatility is one of the most tried and true methods for objectively measuring expected volatility in the spot market. Derived from currency options with different maturities, implied volatilities are used to help predict potential movements in the spot market and is one of the most popular strategies of systems traders and other professional hedge funds.
At its most fundamental, the basic and intuitive interpretation of this implied data is often the most telling for traders. Taken alone, a steady rise in the longer-term implied volatility (the red line) is indicative of a strengthening trend; while inversely, a decline often reveals that a period of range or consolidation in spot is ahead or already in place. Additionally, the histogram or spread between the shorter and longer-term implied volatilities (the blue colored bars) tells a different perspective. As the histogram rises, volatility is expected to pick up faster in the near future relative to the longer-term range. Ultimately, this increases the probability of a breakout scenario in the underlying currency.