Of course we would be remiss if we did not point out substantial economic event risk in the hours and days ahead, and very short-term USD moves will almost certainly depend on the outcome of several reports and announcements. Regardless, we believe that positioning favors continued Dollar rallies—especially against the previously high-flying Australian Dollar, New Zealand Dollar, and Canadian Dollar.
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Euro/US Dollar Options Analysis
Continued US Dollar rallies have unsurprisingly been met with similarly aggressive moves in Forex Options market risk reversals, and we continue to see markets hedge against and bet on US Dollar strength. Given the speed of Greenback appreciation, we are fairly confident that this is the beginning of a larger recovery. Yet it is likewise clear that all prices almost never move in a straight line. As 1-week Euro/US Dollar risk reversals hit their most bearish in approximately the past 90 days, there is distinct risk of a short-term USD correction (EURUSD bounce) in the context of a larger rally.
British Pound/US Dollar Options Analysis
Forex Futures and Options paint a much more sanguine picture for the British Pound against the US Dollar, as the previously-downtrodden GBP has generally outperformed major counterparts despite dramatic USD strength. Non-Commercial futures positioning is actually still net-short the GBP/USD and has been since the pair traded near 2.00. As traders unwind their leveraged bets through times of financial market uncertainty, the GBP may in fact strengthen on a pullback in net-short open interest.
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. Given that risk reversals have hit clear bullish extremes, however, buying the USD/CAD presents poor risk-reward on clear risk of a shorter-term pullback. Yet the speed of the pair’s recovery suggests we can expect further USDCAD rallies through coming months.
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
Current Futures and Options data suggests that the previously high-flying Australian Dollar will continue to depreciate through the coming months of trade. The most recent CFTC Commitment of Traders data shows that Non-Commercial traders stood at their most net-long the AUD/USD since the pair topped near 0.95. Risk reversals have since corrected substantially and show that markets are betting on and hedging against further AUD depreciation. Given the extremely one-sided nature of speculative positioning, a further unwind would almost certainly bring AUD/USD losses.
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
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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