Forex futures and options sentiment show the US Dollar at current bullish extremes—leaving scope for further short-term USD pullbacks. Indeed, the Dollar had spent much of late 2009 in exactly the opposite position and the dramatic shift signals that the general tide has turned. We believe that the US Dollar will finish 2010 significantly higher against the Euro and other currencies, but our shorter-term forecasts point to further USD losses.
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A recent drop in forex options market volatility expectations suggests we may not see any substantive US Dollar breakouts through upcoming trade. Yet this hardly rules out a slower but persistent near-term downtrend for the US currency. Indeed, that seems the most likely outcome given current Futures and Options sentiment.
Euro/US Dollar Options Analysis
Forex futures Non-Commercial positioning on the Euro/US Dollar has hit its most bearish levels since the Euro bottomed in late 2008, while forex futures sentiment points to a healthy bounce in EUR/USD sentiment. Risk reversals had hit their most bearish levels in the previous calendar year at almost the exact point at which the Euro set its 2010 low. The combination of bearish extremes in futures positioning and bullish resurgence in Forex Options risk reversals suggests that the Euro may post further short-term rallies against the US Dollar.
British Pound/US Dollar Options Analysis
Our Forex Futures and Options-based forecasts for the British Pound are quite similar to the Euro. Futures traders are now their most net-short since the GBP set an important bottom, and options risk reversals have surged aggressively through the recent GBP/USD bounce. Given such signals, we feel there’s reason to look for further short-term GBP/USD strength.
US Dollar/Japanese Yen Options Analysis
Japanese Yen positioning is currently at clear bearish extremes with forex options market risk reversals at their most bearish (bullish USDJPY) in approximately a year. This leaves the US Dollar/Japanese Yen pair at fairly clear risk of a pullback, and the recent turn lower in price suggests we can see further USDJPY declines. Indeed, a hold of the 61.8% Fibonacci retracement of the pair’s 97.80-84.80 move at 92.80 and its 200-day Simple Moving Average leaves our short-to-medium-term bias to the downside.
US Dollar/Canadian Dollar Options Analysis
Forex options and futures markets remain quite bullish the Canadian Dollar against its US namesake, leaving the door open for further short-term USDCAD declines. Several months ago we claimed that the USDCAD was likely to bounce substantively on clearly one-sided USDCAD-bearish sentiment. Positioning has since moderated, however, and there is once again scope for Canadian Dollar appreciation. Short-term momentum favors further USDCAD declines and we remain bearish until further notice.
US Dollar/Swiss Franc Options Analysis
Non-Commercial futures positioning on the US Dollar/Swiss Franc pair recently hit its most bearish in nearly 5 years—pointing to clear sentiment extremes. A sharp US Dollar reversal produced a flip to net-long and underlines the aggressiveness of the recent USD recovery. Despite the shift, however, futures positioning is not at any major extremes. Forex Options markets risk reversals actually hit bullish extremes and have pulled back through more recent trade. Relative indecisiveness gives us little bias on the USDCHF pair.
Australian Dollar/US Dollar Options Analysis
Short-term Australian Dollar forecasts suggest the pair may bounce from recent lows, but overall positioning favors more long-term weakness. Australian Dollar forex options and futures positioning had previously hit substantial bullish extremes, and we called for a noteworthy pullback. Watch for risk of short-term bounces, but our longer-term remains bearish on a potential unwind of Australian Dollar long positions.
New Zealand Dollar/US Dollar Options Analysis
The New Zealand/US Dollar pair is quite similar to the AUDUSD, with significant sentiment extremes leaving the door open for longer-term declines. Yet the AUDUSD has clearly outperformed, and traders have begun pulling back from their previously one-sided NZDUSD positioning. Overall forecasts are similarly bearish, but watch for a near-term bounce.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
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