Currency Spot Price Barometer Reading
EURUSD 1.2926 RANGE
GBPUSD 1.9133 RANGE
USDJPY 116.73 TREND
USDCAD 1.1413 RANGE
USDCHF 1.2272 TREND
AUDUSD 0.7757 RANGE
EURUSD
Short-term US implieds dropped across the board last week as State-side traders closed their terminals early to get a jump start on the holiday weekend. For the euro pairing, like most of the majors, the drop in both the long and short-term implied figures came at an unusual time since the currency just overcame the 1.2900 level. The drop in expected market action is not far-fetched though as fundamental indicators are in short supply this week, and the number of key releases in the previous period failed to seriously move the market. Looking to the vols indicators, the drop in the long-term read suggests the recent pick up in price action will not evolve into a trend. Furthermore, history shows a swing lower in the spread usually results in a market turn, both calling for 1.30 resistance to hold.
GBPUSD
Like the euro, implied volatility derived from British pound spot provided mixed sentiment when compared to recent price action. A massive break of the 1.9000 figure sent the GBPUSD to within stones throw of the 1.9200 high set two weeks ago. This big level is likely the reason long and short-term implieds responded differently to the big rally. Expectations that todays candle was the beginning of a developing trend were shirked by the long-term vols gauges drop to match recent record lows. On the other hand, the short-term measure responded to the quick move by pushing the spread from two-and-a-half month low to near-par. Usually after steady declines or increases in the differential are flipped, the result is often a market turn, not an unlikely scenario with 1.9200 standing in the way.
USDJPY
Implied volatility for the Japanese yen was in sync with spot action over the past few active sessions. Prior to the most recent drop in the USDJPY, price action was consolidating into an ascending triangle formation that kept the long-term implied read on a steady decline. It wasnt until Wednesdays 115 point decline that the volatility situation picked up somewhat. Though it is not visible on this chart, the singular long-term indicator corrected off of fresh record lows, while the implieds spread marked a jump into positive territory. From the volatility figures, the change in conjunction to price comes as no surprise since the historical relationship between long-term vols and price indicates that the market forecasts the next trend to be to the downside.
USDCAD
Though the USDCAD was able to overtake the high at 1.1460, the implieds picture revealed that the milestone was less of an accomplishment for market sentiment than would be expected. In fact, over the past two weeks, as the pair climbed steadily higher, the long-term volatility gauge actually resumed its decent. Nearing the lows marked in the end of October, there seemed little confidence that the move was the initiation of a new trend bulls had hoped for. Instead, the reversal on the big 1.15 figure has actually roused both the long-term and implied spread gauge, leading market observers to believe that the lull in volatility has choked the possibility of any big moves, or that the bias has changed and long-term implieds are now following a new leg down in the pair.
USDCHF
Swiss franc implieds, like so many of the majors have not confirmed the technical break in the underlying USDCHF. Until recently, both the long-term and short-term implieds have trended lower. Over the past four weeks, the long-term gauge has dropped below 6.5 percent. From the first two incidences, the indicators descent to this level has coincided to a quick rebound in underlying spot. While the most recent mark on this level was not a quick retracement like before, volatility did pick up for spot in the form of a 150-point drop. Technically speaking, this new candle has broke a six-month, rising trend channel. However, implieds are still tame with both the spread and long-term gauges rising only modestly. The real confirmation of a new trend will come next Monday when liquidity returns.
AUDUSD
Butting up against major resistance, implied volatilities derived from the Australian dollar are not lending the enthusiasm to the most recent move that bulls would like. The long-term vols reading has budged little from its lows, suggesting market participants are waiting on the sidelines until a break in big resistance above 0.7770 or a new wave down is established. The spread may be the better forecasting tool for the AUDUSD pair. Just before the big jump in spot, the spread between long and short-term vols hit an extreme low not seen since April, foreshadowing an impending sharp move. Looking through history though, we see that the follow through in the normalization in the spread generally does not come with reliable follow through. Therefore, a break higher may be off the books, at least until next week. This also seems sound fundamentally as the economic release calendar has thinned out.
