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EURUSD
Long-term implied vols for the US dollar are breaching record lows. This has in turn led to much of the same in the benchmark EURUSD pair. The past weeks low volatility environment seems to run counter to one of the few reliable seasonality effects that can be found in the currency market the summer doldrums. With European traders back from their long holidays at the beginning of September, most market players were expecting liquidity and action to return with them. One possible explanation for the quiet market is the evolution of interest rates. With the Federal Reserve putting the stopper in its steady rate hikes, and other low yielding currencies catching up, differentials are narrowing which has many big players trying to absorb as much of the carry as possible. One glaring issue for traders in this low vols setting was the break of the long-term, rising trendline two weeks ago around 1.2750, that without dollar bids to fuel the run, could completely eliminate its technical importance.
GBPUSD
While the Sterlings long-term volatilities continues to trend lower, its spread has started to show some life. Just this past Monday, short-term implieds overtook long-termed ones for the first time this month, ushering in a few moves that have run for nearly 150 points. With the spread still shallow in its negative pullback, the GBPUSD is still fertile for a further rallies that would carry the spread back above the zero line. However, unless the spread starts to produce a viable trend of positively skewed short-term interest, mild breakouts and slow range trading is all that will likely form. Given these conditions watch for the GBPUSD to wade between its 1.8900 and 1.8775.
USDJPY
Long-term implieds in the yen-denominated major are still above recent historical lows set just a few weeks ago, but the sentiment is the same. Market participants are still sidelined until a catalyst can convince them that major a major move could soon be underway. The technical levels that are present in USDJPY support such an outlook. After trending higher since Mid-May, the pair has come into contact with a falling trendline that dates back all the way to 1998. While the long-term read looks content to dragging it belly along the bottom for the meantime, a change will have to come some time. Fundamentally, this break and new trend could be initiated by a turn for the worst in Thailand or more likely new developments in the BoJs rhetoric surrounding its intentions for interest rates. Until this occurs though, the pair could have difficulty move beyond its 117.00 119.00 range.
USDCAD
The only pair on our list that isnt listed as a breakout, the Canadian dollar is still relegated to only a neutral read. Though its long-term implieds have slowly trended lower, they are still well above the lows seen earlier this month. This pair does hold some potential for either the initiation of a new long-term trend higher or a fall back into its previous range though. Just recently, the USDCAD was able to breakout of its 1.1225 1.1130 range, but the lack of interest showed in short-term vols (implied through the spread) cut the momentum behind it short. Like the USDJPY, this pair is testing a large falling trendline currently around 1.1300. If a move higher can materialize, long-term implieds could quickly rise in anticipation of a steady trend higher. Otherwise, a dip back into the former range area will further sap confidence that volatility will pick back up.
USDCHF
Like the euro, the Swiss franc is testing new lows in its long-term implied volatilities, despite the trend that has driven spot 350 points in the past few weeks up to 1.2600. This lack of long-term ambition behind the move likely indicates a solid break of the big resistance level would be difficult to facilitate. Short-term moves are still on the bill though. The implied spread has steadily trended higher since mid-August and has seen a few peaks into positive territory since then. This could be an indication of a developing trend, though which way it leads is questionable. A trend could develop back towards 1.2200, which would slowly lift the long-term implied indicator. The less likely scenario would see the 1.2600 level taken out (requiring a sizable breakout read), which would subsequently lead to a quick turn in the long-term implieds as more traders join the new trend.
AUDUSD
As is the case with most of the other currencies in this report, the Aussie dollar has been relegated to range-bound spot action. Even the most influential move in the past few weeks, the eventual drop below 0.7550, was unable to prompt a big response for implieds; and now with support forming just below at 0.7500, the market is showing little confidence in the AUDUSDs next move. One interesting observation however with the recent 200-point slide that has brought the pair to its current level, was the slow turn in long-term implieds and a trend higher in the implieds spread. Should both indicators continue their positive shifts, it would likely signal a continuation in the downtrend which would in itself incite further interest in the pair and buoy long-term implieds.
