VIX goes for pre-crisis low, watching NZDJPY

Still watching NZDJPY for a possible long trade. The pair is quickly approaching the falling trendline at 83.295 from 2014. In case of a breakout at the monthly close, I'll buy NZD with a first target at 88. The move is currently supported by a broad risk-on sentiment, with the volatility index VIX apparently aiming for its 9.39% pre-crisis low and many equity indices going for their respective all-time highs.

Open positions as of 26/01/2017 11:11am CET:
EURTRY short from 4.0524, unrealized return: -1.97%

Realized YTD return: +0.7% from 2 trades
Total YTD return: -1.27% from 3 trades

Watching NZDJPY for breakout

Let's be honest: It's been a rather boring week in FX and I'm happy it's drawing to a close. Yellen's comments didn't really provide any new information, yesterday's Draghi presser was a snoozer, volatility in G10 FX was subdued. Only Theresa May's Brexit speech moved markets by giving a short-lived boost to the GBP, but that's unlikely to persist with actual Brexit negotiations on the horizon.

Looking forward, Trump might stir things up from early next week. I still favour USD long trades but, as I've said before, I'm waiting for a catalyst before entering into a new position.

I also like NZDJPY long with a potential breakout above 83.29-.75 that might extend to 88 or even 93. In addition, the pair offers a bit of a carry pickup. On the sidelines as of now, but standing ready to open that trade if momentum doesn't fade.

NZDJPY 20/01/2017G10 Interest Rates 20/01/2017Open positions as of 20/01/2017 9:00am CET: Flat

Realized YTD return: +0.7% from 2 trades

EURUSD implied volatility drops below 4.6%

EURUSD 1M Implied Volatility 25/06/2014

Volatility implied by one-month at-the-money EURUSD options dropped below the 2007 low of 4.65% today, hitting a new record low just above 4.5%.

FX volatility has decreased continuously over the past three years. Although there was a brief blip after the June 5 meeting of the ECB's governing council, it came as no surprise that implied vol resumed its fall below 5% rather quickly. The continued decline of FX volatility this week contrasts with an increase in the VIX after the S&P 500 bounced off a new all-time high yesterday.

The pronounced period of low volatility is a result of highly accommodative central bank policies in the United States, United Kingdom and Europe, in light of which many analysts sound a note of caution, reminding investors that past periods of such extreme complacency were usually followed by a sharp sell-off. While this may be true, a strong trend reversal can only be triggered by an important event in the market. As long as central banks hold their protecting hands over asset markets, this is unlikely to happen. Markets cannot reliably be timed based on low levels of volatility anyway. Investors afraid of a volatility comeback may therefore prefer to purchase options, which are generally cheaper when implied vol is low, instead of outright exiting the market.

Low levels of implied volatility are supportive of carry trade strategies, because moves in the exchange rate tend to be lower and the risk of FX losses eating up the profits from interest rate differentials are perceived to be lower. We might thus see more interest in trades such as NZDJPY long or EM currencies, especially when taking into account that satisfactory returns are increasingly hard to be found in DM assets, unless you are willing to bear the risk of keeping equity investments despite arguably high valuations. Traders seeking to exploit the interest parity condition via the carry trade must not lose sight of the fact that this is nevertheless a highly speculative bet whereby you are basically "picking up pennies in front of a steamroller", i.e. carry strategies tend to blow up suddenly.