Friday’s muted NFP did not change the big picture. Vol is still declining in most asset classes with few exceptions. In the chart above AUD implied volatility is falling faster than the actuals.
The AUD hourly chart above shows more clearly the muted response to Friday’s NFP. Despite the AUD rally, momentum is still in negative territory.
Canada is holding a good LT trend line back to May of last year. CAD risk reversals are also slowly losing their premium for US dollar calls in spite of the slow grind higher.
Another sign of the Trump trade ending is the break in the IV trend line in the MXP vol chart. MXP vol has been steadily rising in line with the weakness in the peso. That seems to be over for the near term as the MXP consolidates and IV levels are beginning to erode. There are still substantial bids in the risk reversals for US calls and they remain very well bid. If the risk reversals get sold off as well that would be further indication that US-MXP tensions are falling.
GBP dispersion is low and implies an increased probability of trending price action in the near-term. As the election nears one week GBP vol ended the week sharply higher the but rest of the curve hardly moved. This may well prove complacent.
GBPJPY six week STDEV has rolled over suggesting a short-term top is in place. The correction is adhering to a falling wedge formation that is also implicitly suggestive of lower vol levels ahead.
CAD short term actual vol levels also moved lower following the payrolls. The one fundamental economic release from Friday that did not attract much attention was the sharp rise in the CDN productivity numbers, a trend if sustained could be very bullish.
As mentioned above CAD risk reversals are losing their premium for US calls, particularly in the front end of the curve.
Following the French election, the EUR is still challenged by the 1.10 level vs the CHF.
GBP risk reversals moved sharply lower following the latest batch of UK election poles. One week GBP was bid up, however, the rest of the curve remained relatively unchanged. The market seems to be anticipating a short one-off move and then a quick return to more normal trading conditions. This may well be complacent.
The EUR closes higher but not with much conviction. There is lots of congestion above and it still seems to suggest a lack of upside momentum.
The slow erosion of copper is another indication of the unwind of the Trump trade.
WTI has been more volatile than copper but in a choppy fashion. Lots of topside resistance at 55 and some support at 46 and 43.
EURCAD momentum nearly makes it back to par and then has a weak rally following Friday’s employment report. There is more evidence here of exhaustion rather than suggesting an impulsive move higher.
The chart above is with acknowledgment to Variant Perception. We are for all intents back to the vol lows that preceded the financial crisis. History does not repeat but it may well rhyme. Selling vol here is as the old saw goes like picking up pennies in front of a steamroller. In periods of extreme vol compression, there is a higher probability of capital misallocation. Too much is capital is supplied to industries and sectors that are interest rate sensitive. There is an insufficient appreciation of the importance of liquidity. In the public markets, passive strategies are heavily preferred over active management. Tail risk hedging strategies move out of favour and there is a general increase in complacency. Interest rate compression and vol compression are correlated.
There was more action in US Treasuries which closed under the 200D m.a. In line too with the reversal of the Trump trade. It is also happening in the equity markets with small caps underperforming, the financials weak along with the materials sector that was supposed to capitalize on a potential infrastructure spend. Equity markets have been lead higher by the FANG stocks but with very little breadth.
GBPCAD may have found some short term support around 1.7250.
EUR-JPY momentum nearly corrects back to par and the spot looks to be forming a triple top formation.
Best Regards,
James Rider
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