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Forex Futures and Options Point to US Dollar Recovery

By , Quantitative Strategist
10 December 2009 21:56 GMT

Forex futures and options positioning data suggests that the US Dollar may continue its recent recovery, rallying further against the Euro and other major counterparts. CFTC Commitment of Traders data shows that Non-commercial traders—most often speculative in nature—remain heavily short the US currency. We have and will continue to argue that such one-sided sentiment leaves clear currencies at risk of further correction. Such forecasts likewise coincide with more short-term Speculative Sentiment Index figures, but it remains critical to watch  whether the Euro/US Dollar pair breaks below the key 1.4700 mark.

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Volatility expectations jumped considerably through recent US Dollar rallies, and FX Options markets continue to price in substantial price moves through the medium term. Yet shorter-term volatility expectations remain quite muted, and it will be critical to watch whether the US Dollar and other currencies can break out of their recent trading ranges. A jump in volatility expectations would likely spark further Dollar corrections.

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Euro / US Dollar Options Analysis

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Futures positioning on the Euro/US Dollar shows that speculators have pulled back from bullish sentiment extremes, but Non-Commercial positions nonetheless show longs outnumber shorts by a healthy margin. FX Options risk reversals has likewise pulled back fairly substantially from bullish extremes—actually hitting their most bearish in the past calendar year through most recent trade. The substantive flip in FX Options sentiment gives us reason to look for further declines.

 

British Pound / US Dollar Options Analysis

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FX Options and Futures sentiment continues to suggest the British Pound may outperform the Euro on comparatively neutral positioning. Non-commercial traders actually remain fairly net-short GBPUSD—as they have been since it last traded above 2.0. FX Options risk reversals are decidedly neutral the currency pair, and our short-term outlook is somewhat mixed. Suffice it to say, however, a further unwind of FX Futures positioning would produce GBP strength.

 

US Dollar / Japanese Yen Options Analysis

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FX Futures and Options positioning have hit opposite extremes on the US Dollar/Japanese Yen pair, giving an effectively mixed forecast on near-term price action. Indeed, FX Futures data shows that Japanese Yen longs (USDJPY shorts) substantially outnumber shorts. Given such clearly one-sided sentiment, we would often call for a Japanese Yen pullback (USDJPY rally). Yet FX Options risk reversals are at the opposite end of the spectrum, giving us a somewhat neutral bias.

 

US Dollar / Candian Dollar Options Analysis

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We have persistently called for Canadian Dollar weakness against the US Dollar (USDCAD strength), but a sharp shift in sentiment suggest the pace of gains may slow. Non-Commercial futures positioning had reached the most USDCAD-bearish (Canadian Dollar bullish) extremes since the pair traded near parity. We have seen futures positioning pull back somewhat, but the bigger story is FX options risk reversals. The sharp shift signals that USDCAD gains may slow.

 

US Dollar / Swiss Franc Options Analysis

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Non-Commercial futures positioning on the US Dollar/Swiss Franc pair remains the most bearish in nearly 5 years—pointing to clear sentiment extremes. Yet FX Options actually show that risk reversals are at bullish extremes and give a decidedly mixed view on the Swiss Franc. All else remaining equal, we expect that an unwind of USDCHF shorts (Swiss Franc longs) will produce rallies. Yet the sharp shift in Risk Reversals suggests that the pace of gains will slow.

 

Australian Dollar / US Dollar Options Analysis

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We continue to call for a sustained Australian dollar pullback, as sentiment has remained extreme for quite some time now. Non-commercial futures traders remain near the most net-long the AUDUSD since the pair previously traded above 0.90. Recent moves in FX Options markets likewise show that traders have begun to hedge against Australian Dollar weakness, and an unwind of extremely bullish positioning could force a substantive AUDUSD pullback.

 

New Zealand Dollar / US Dollar Options Analysis

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The New Zealand dollar/US Dollar pair is quite similar to the AUDUSD, with significant sentiment extremes leaving the door open for near-term declines. Yet the AUDUSD has clearly outperformed, and traders have begun pulling back from their previously one-sided NZDUSD positioning. Short-term forecasts are decidedly less clear.

 

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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10 December 2009 21:56 GMT