Forex Futures and Options markets show that large speculators continue to bet on and hedge against further US Dollar strength—giving us a strong bullish forecast on the resurgent currency. Indeed, we have been calling for an aggressive US Dollar turnaround for quite some time now and believe that the currency may continue higher. Markets have been aggressively net-short the US Dollar for quite some time now, and an unwind of positioning would almost guarantee dollar strength. Positioning has since moderated somewhat, but we maintain our calls for further medium term Greenback gains. Given fierce appreciation, however, traders may do well to wait for a short-term pullback before going long the Dollar.
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Euro/US Dollar Options Analysis
Aggressive US Dollar rallies have been met with similarly enthusiastic USD-buying from Futures and Options markets, as positioning figures show traders have grown aggressively long the resurgent US currency. We have written time and time again that the rapid shift suggested that this is the US Dollar reversal we had long (and prematurely) been calling for, and recent price action has all but confirmed our hypothesis. Going forward there is admittedly strong risk of a short-term EURUSD bounce, but overall momentum continues to favor US Dollar gains (EURUSD declines).
British Pound/US Dollar Options Analysis
Forex options traders have quite aggressively bet on US Dollar strength against the British Pound, showing risks remain to the downside through upcoming trade. Last week we claimed that the GBP stood to gain on a broader unwind in speculative futures positioning. Yet we failed to account for the fact that the sheer strength of US Dollar buying would completely offset any such shifts in GBP/USD positioning, and the British Pound finds itself significantly lower. Overall momentum favors further GBP losses against the resurgent US Dollar.
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. Previous 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
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