The volatility playbook for the week ahead

Author: Chris Weston | Category: News

A look at implied volatility

USDJPY has seen good flow, and benefiting from Trump talking up proceedings with China and we see the pair holding the 108-level, while USDTRY has also had good interest, although traders are loath to be long for any great period of time given the cost of carry.

There is a lot to play for still and the script can change at any moment in Brexit, so Its tough staying long GBP for any period of time. It does feel that ahead of the 19TH October that traders will be buyers of weakness, but its risky and given the IV I would be keeping my position size to a minimum. 

My weekly volatility scan has GBPUSD 1-week implied vol moving to the top of the pack, which should not surprise ahead of next week's EU Summit and a potential Article 50 extension. 

A look at implied volatility

We've seen options traders piling into GBP upside structures, where we can see GBPUSD 1-week risk reversals moving into the 96th percentile of the 12-month range. This highlights a sizeable skew in call buying over puts and demonstrates that the market feels the path of least resistance over the week is higher. 

Realized vol

I cover these dynamics in the video, with a focus on positioning, implied moves and event risk that will drive markets next week. I remain fixated on USDCNH, especially as it is driving AUDUSD so intently. While, I continue to watch EU inflation expectations, as they have moved from near 1% to currently sit at 1.16%, and are driving German bund yields - which, in turn, is promoting a better bid in EURUSD. 

EURUSD chart

One aspect I miss out in the week ahead video is the fact that next week is the start of US Q3 earnings, which kicks off in earnest with JPM, C, GS and WFC hitting the street with numbers. 

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