CIBC:
Euro took out the 1.3250 barrier – traders witnessed good demand from 1.3255 to 50 but selling was overwhelming. The next layer of bids are at 1.3225, however keep an eye on 1.3200. I am told there is a digital option there which is larger than the one at 1.3330. Sell orders are placed above 1.3280 but think it will be a struggle at 1.3265-70.
UsdJpy rose to 103.965; market is aware of offers surrounding 104.00 up to 104.20. A story in Nikkei that the banking and insurance units of government-backed Japan Post Group have been buying foreign bonds and equities. Interesting that Nikkei headline the article “Japan Post’s asset buying keeping yen weak amid geopolitical risks”. One Asian real money account warned about getting excited with UsdJpy. There are several resistance near 104.20 and stochastic points to overbought.
Someone obviously had interest in AudNzd – prior to Asia opened, someone drove the cross to 1.1103! The Aussie dropped following a lower China HSBC Manufacturing PMI. We bounced back after 0.9235 low and 0.9200 comes under the radar. Since April 3 2014, we have not been able to break that level and I heard there are really toxic stuff below.
NzdUsd took out 0.8450 – we saw a Swiss name bidding there. Printed 0.8347 and bounced right back. Another option barrier at 0.8300; most think that should hold.
UK bank was seller of Gbp to take out stops below 1.6580.
UsdCad grind higher slowly – printed 1.0984. One US name was seen capping Usd at 1.0975 since Toronto hours but his offers depleted during Asia. Fresh buy orders below 1.0960 and option guys selling above 1.0990. There is a very large 1.1000 UsdCad option expiring on Wed Aug 27, rumoured that the notional is larger than $1.5bn.
soc gen – Front end USDJPY RRs have spent the past month breaking into and out of flat (see attached chart of 1mos) and today for instance we are 0.1 Yen calls over in the 1m. Whereas about 2wks ago we were 0.4 favor Yen calls but a month ago we were 0.2 favor Yen puts.
Supply and demand dynamics aside the question that all of this makes me ask is whether vols go higher when spot goes up or when it goes down.
The very simple way to answer that question is to look at how vols reacts to moves in spot broadly. while I grant you that this is a very short time horizon, if you look at where 1m vols have tended to bounce its been points at which spot has broken up more so than broken down. Consider that since May the spot range has roughly been 101.50-103.50. 1m vols broke 6.5 from abotu 5.5 in early June (around the ECB/NFP actually). The also rallied from about 4.75 to 5.75ish when spot rallied through 103.00 on last month’s Fed/ADP/GDP rally. Today on the break through 103.25 we’ve seen 1m flirt with 6.0 again (5.95 was paid than give). Further to the point higher in mid July when the spot market was testing the 101.50 region we only just based off of the 4.4ish cycle lows to 5.0ish. (see attached)
Seeing as this is USDJPY and the DNT/barrier activity has been robust of late all of this obviously hinges on exotics in the market. So I suppose that given that we’ve broken through 103.00-25 and not below 101.0 or even 100.0 makes this assessment bias but my takeaway from this situation is that the weaker side of spot for the vol market is USDJPY higher and RRs probably should reflect this trading favor JPY puts (USD calls)
WP.. Euro – After yesterdays comments that euro was seeing offers from reserve managers and strangely euro corporates had pulled their bids the mkt talk is that bids have returned 1.3250-20 with 38.2% fibo at 1.3228, barrier int at 1.3200. Suspect any move higher will run into offers ahead of xxx 1.3285-1.3300 in euro 1.8bln