Risk reversals on over-the-counter FX Options show that many have aggressively bet on and hedged against further US Dollar strength. Given the intensity of the recent US Dollar recovery, we see clear scope for further US dollar rallies through upcoming trade. Our short-term-oriented Speculative Sentiment Index positioning numbers likewise point to US Dollar appreciation against nearly all major counterparts.
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Volatility expectations have jumped noticeably through very recent trade, supporting our calls for further US dollar volatility. Longer-term volatility numbers have nonetheless trended lower and represent a risk to our forecasts.
Euro/US Dollar Options Analysis
A dramatic US Dollar rally against the Euro and other key counterparts has forced a similarly sharp shift in Forex Options sentiment, and options traders are now the most bearish Euros/bullish US Dollars in approximately 12 months. Delayed Forex Futures data likewise shows that speculative Non-Commercial traders are similarly bearish the Euro/US Dollar pair, and we believe that recent tumbles are further proof that the Euro set an important medium-term top and is likely to continue lower through upcoming trade.
British Pound/US Dollar Options Analysis
Forex Futures and Options sentiment data points a much more nuanced picture for the British Pound against the US Dollar. The GBP is among the very few major currencies that have remained relatively unchanged against the resurgent Greenback, and positioning data likewise suggests it may continue to outperform through upcoming trade. Forex options trends actually show that traders are increasingly betting on GBP stability. All the while, Non-Commercials futures traders’ positioning is essentially near the middle of its year-long range. Watch for British Pound stability.
US Dollar/Japanese Yen Options Analysis
Japanese Yen Forex Options sentiment data suggests that the US Dollar/Japanese Yen currency pair set a fairly major top and is likely to trend lower through upcoming trade. Non-Commercial Futures positioning showed that speculators were essentially the most bullish-USDJPY (bearish Japanese Yen) since the pair set a significant top at 110—warning that sentiment was unsustainable and a reversal was likely. We have indeed seen the pair pull back substantially, and the dramatic shift in risk reversals suggests this will continue through upcoming trade.
US Dollar/Canadian Dollar Options Analysis
The dramatic US Dollar recovery against the Canadian Dollar suggests that the USD/CAD currency pair set an important low through recent trade. Forex futures data shows that Non-Commercial traders (typically speculative in nature) hit their most bullish Canadian dollars (bearish USDCAD) since the pair traded at parity. Such especially one-sided positioning suggests that we reached an important bearish extreme, and the sharp jump in risk reversal shows that options traders are increasingly hedging against Canadian dollar weakness (USDCAD strength).
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. We have little reason to disagree with such an assessment, and our generally bullish US Dollar forecasts implies that we expect the USD/CHF pair to continue higher through short-term trading.
Australian Dollar/US Dollar Options Analysis
Extremely one-sided Australian Dollar Non-Commercial futures positioning and a sharp shift in Forex Options sentiment signals that the Australian Dollar/US Dollar currency pair set an important top through recent trade. Indeed, we have long called for an Australian Dollar reversal on clearly extreme speculative positioning. Yet the timing of a trend change is extraordinarily difficult and is only 100% certain in hindsight—hardly useful for trading. The clearly dramatic moves in Forex options risk reversals nonetheless show that traders are hedging against Australian Dollar weakness.
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. Forex options sentiment on the New Zealand Dollar/US Dollar pair has seen a very sharp shift and shows that many are hedging against/betting on further NZD/USD weakness. Given such big moves in price, we see little reason to disagree and likewise expect further New Zealand Dollar weakness.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
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