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EURUSD <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

In last weeks report, the volatility spreads breakout reading accurately predicted the Euros precipitous freefall the following day. Given the large gain in actuals, however, market expectations of choppiness ahead of the U.S. Treasury International Capital report are not enough to bring the spread above the breakout range.  Of great interest, the underlying spot prices recent tumble has forced it below its 50-day simple moving average for the first time since March, but its recent rally has unsuccessfully retested the line. Subsequently, the narrowing of the barrier bands seems to suggest another volatile and directional move following the current consolidation.

GBPUSD

Much like with the Euro, our indicator accurately predicted last weeks breakdown of the underlying spots consolidation pattern. However, unlike its continental counterpart, the pounds recent rebound kept it clearly above its 50-day moving average, from a technical standpoint. Now in the neutral zone, the vols spread gives no clear indication of whether we can expect further directional bias with both components relatively neutral.  Notably, actuals rose the second highest on the week and look to be reflective of recently heightened dollar awareness rather than sterling fundamentals.  Further breakout potential exists as the jump above the lower band serves as near term confirmation of a pop in the spot.

USDJPY

After piercing well-below its lower band, the vols spread immediately jumped when the USDJPY broke out to reach new monthly highs in recent trading. Given nervousness ahead of the current week of significant economic data, implieds rose to meet actuals and shrunk the spread to near parity. While this puts our indicator clearly into the neutral zone, special attention should be given to the narrow range it has seen in the past several weeks. Much like Bollinger bands on spot price, exceedingly narrow bands on our indicator often precede large movements in the underlying currency pair. As such, an extended period of low deviation in spread could actually predict highly volatile trading days to come.

USDCHF

As is custom, price movements in the Swissie have nearly mirrored those in the Euro. Thus following a lull in implied volatility, our indicator breached its lower band to warn of choppy price action within the past week. The USDCHF subsequently broke out to monthly highs, while a gain in implied volatility preceding the Swiss Central Banks interest rate decision brought the vols spread to neutral levels. As with the USDJPY, however, we notice that the range in actuals and implieds has been in a narrow range within the past 20 days. Thus while our barometer currently forecasts smaller price fluctuations, an extended period of narrow ranges could produce a clear breakout signal.

USDCAD

Despite trading in a very choppy range of over 300 pips, the Loonie has remained almost exactly unchanged in the past week of trading. Thus with a gain in actuals that far exceeds the miniscule gain in implied volatility, our barometer currently shows that a breakout is imminent. The underlying USDCAD price is at the midpoint between its two-month high and 18-year low with no significant support or resistance levels in sight. Given this, it is difficult to predict what the currency will do if it is indeed to break out of its range. Regardless, it is increasingly likely that its two-month sideways trading environment will come to an end.  However, a short pickup would add to the confirmation and strengthen the suggestion.

 AUDUSD

Despite their exceedingly large 3.5 point spread, Aussie vols have remained relatively unchanged since our previous report. After discounting the spreads impressively large gain in May, the deviation bands have begun to reflect the quietness of our indicator in the past several weeks. Thus our barometer remains in the neutral zone, failing to paint a clear picture of the future in price range for the underlying spot price. Regardless, we can easily see that the currency pair has been in a clear downtrend since reaching yearly highs in May. With the lack of clarity in implied and actual volatilities movements, there is little reason to believe that this trend will change or reverse in the coming trading days.