Lackluster volatility in the US Dollar has unsurprisingly coincided with a drop in forex market volatility expectations, and we see little reason to call for major USD moves in the week ahead. Two weeks ago we had claimed that a substantial Dollar advance set the stage for continued advances. Yet the subsequent USD pullback left us clearly on the wrong side of the market and the Greenback remains in a choppy trading range against the Euro, British Pound, and other key counterparts. The sole exception is the US Dollar/Japanese Yen pair, and impressively strong speculative sentiment in the USD/JPY suggests it may continue to see short-term gains.
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Euro/US Dollar Options Analysis
The Euro/US Dollar has frustratingly stuck to a tight trading range through the past week, giving little indication as to where it may trade next. Recent Commitment of Traders data shows that Non-Commercials remain very heavily net-short the EUR/USD, underlining the intensity of the medium-term downtrend but highlighting risk of reversal. The sharp bounce in FX Options risk reversals likewise indicate that sentiment may be turning in the Euro’s favor. But until we see an earnest break of recent ranges it is very difficult to take a strong stance on the EUR/USD pair.
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. Just like in the EUR/USD, risk reversals have quite recently turned sharply in the British Pound’s favor. Yet almost exactly the same thing can be said for the rangebound GBP/USD. Until we see an earnest break it is difficult to take a strong bias on the GBP/USD given current market indecision.
US Dollar/Japanese Yen Options Analysis
Sharp rallies in the USD/JPY have unsurprisingly coincided with a considerable swing in FX market sentiment, and Non-Commercial futures traders are now the most net-long USDJPY since October, 2007. It was at that point in 2007 that the USDJPY had recovered considerably from previous declines, only to top and continue on its march towards generational lows. Of course that isn’t to say that we could see a repeat. Similarly bullish Risk Reversals suggests sentiment has turned the corner and medium-term momentum favors further US Dollar strength against the Japanese Yen.
US Dollar / Canadian Dollar Options Analysis
Timing a USD/CAD reversal has been quite near impossible, and the pair seems quite determined to resume its downtrend despite vastly oversold Non-Commercial futures positioning. An earlier reversal and dramatic bounce in FX Options Risk Reversals gave sign that the USD/CAD rally could be the start of a bigger move, but that has obviously not materialized. In the absence of a dramatic rally, we have little option but to favor further USD/CAD losses.
US Dollar / Swiss Franc Options Analysis
US Dollar sentiment against the Swiss Franc is fairly mixed at the moment, as futures traders remain fairly net-long USDCHF while options traders bet on weakness. Such relative indecision makes it difficult to take a strong stance on the currency pair, but our general forecast for US Dollar strength leaves a modestly bullish bias for the USDCHF.
Australian Dollar / US Dollar Options Analysis
As if on cue, the Australian Dollar has continued rallying despite heavily overbought Non-Commercial futures positioning. We have been caught on the wrong side of the AUD/USD trade an embarrassing number of times now, and it would be fairly irresponsible to claim we can expect an AUD/USD reversal through the foreseeable future. Indeed, there is little indication that we could see any substantive pullbacks through the short-term and similarly little reason to stray from a medium-term bullish bias.
New Zealand Dollar / US Dollar Options Analysis
Our short-term trading stance on the New Zealand Dollar/US Dollar currency pair is quite similar to that of the AUD/USD. Despite signs that the currency pair remains fairly overbought from a Non-Commercial futures trader perspective, the pair remains relatively strong. There is little reason to call for any substantive turnarounds through the foreseeable future, and indeed it seems short-term momentum favors NZD gains.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
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