fx options forecast

Forex options risk reversals show distinct risk that the US Dollar may slip further against the Euro, Australian Dollar and New Zealand Dollar through short-term trade. Indeed, traders have begun to aggressively bet on and hedge against further Euro strength via options, and recently one-sided speculative futures positioning shows distinct risk of near-term corrections. The one caveat remains that volatility expectations have dropped noticeably through recent trade—suggesting that major currencies may remain in their recently-choppy ranges. Yet the first sign of US Dollar losses would likely invite further EURUSD, AUDUZD, and NZDUSD gains.

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Euro / US Dollar Options Analysis

A sharp pickup in FX Options Risk Reversals suggests that the Euro/US Dollar could bounce through upcoming trade—signaling that many traders are betting on and hedging against further Euro strength. Given that forex futures positioning remains heavily net-short the EUR/USD, any unwind in short positioning could force significant strength. Indeed, the longer the Euro holds its lows the greater chance we see a substantive bounce on technicals alone. The limiting factor remains exceedingly low volatility expectations, but watch for risks of a Euro jump higher.

British Pound / US Dollar Options Analysis

Net speculative positioning on the British Pound is quite similar to that of the Euro, with Non-Commercial traders very much net-short the GBP/USD. Similar one-sided extremes in forex options risk reversals suggest that the GBP/USD may continue to decline through upcoming trade, but every further drop greatly increases the probability of a strong bounce. It will be critical to watch whether the British Pound is able to hold its early-March lows. A break lower would likely accelerate declines, while a hold could invite similarly strong rallies. Suffice it to say, the GBP is at a key juncture.

US Dollar / Japanese Yen Options Analysis

Forex options markets have seen traders aggressively bet on and hedge against the Japanese Yen—pointing to further short-term declines (USDJPY rallies). Speculative positioning is, as of last week, aggressively short USDJPY and leaves ample risks for corrections. Short-term risks remain to the topside, and it will be critical to watch whether the pair is able to break above its January-March down-sloping channel.

US Dollar / Canadian Dollar Options Analysis

Forex futures traders remain fairly aggressively long the Canadian Dollar against the US Dollar, and a recent shift in risk reversals shows many are betting on further USDCAD weakness. Some weeks ago we argued that severely one-sided positioning pointed to slower USDCAD declines. Yet positioning has since moderated significantly, and there is arguably further room for the USDCAD to go lower. The sharp shift in risk reversals likewise supports the case for USDCAD weakness. Of course, it will be critical to see whether the pair is able to break multi-year lows at 1.0200.

US Dollar / Swiss Franc Options Analysis

Non-Commercial futures positioning on the US Dollar/Swiss Franc pair recently flipped to net-long the US Dollar against the Swiss Franc—a considerable shift from previously one-sided USD short extremes. The speed at which markets flipped direction is clear signal that the overall tide has shifted, but as with the Euro, one begins to question whether the USD rally has occurred altogether too quickly. The clearly one-sided positioning makes it difficult to bet on further US Dollar strength given the considerable risk of short-term pullback.

Australian Dollar / US Dollar Options Analysis

Forex Futures and Options positioning on the Australian Dollar paint a mixed short-term picture for the recently high-flying currency. Non-Commercial traders—typically speculative in nature—remain heavily net-long the Australian Dollar against its US namesake. All the while, FX Options traders had recently hit bearish extremes and have since pulled back. The considerable shift in risk reversals suggests that the recent rally may continue through the near term. Indeed, we see little downside risk in the AUDUSD absent a substantive turn lower in financial market risk sentiment.

New Zealand Dollar / US Options Analysis

A noteworthy pickup in New Zealand Dollar FX Options Risk Reversals shows many traders are betting on and hedging against NZD strength. Combined with the fact that futures traders have heavily trimmed their one-sided New Zealand Dollar longs through previous declines, we see scope for further short-term NZDUSD strength. As with the Australian Dollar, however, it will be critical to monitor any and all shifts in financial market risk sentiment.

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