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Forex Options Markets Point to Further USDJPY Gains

By , Quantitative Strategist
30 April 2010 17:38 GMT

A sharp jump in volatility expectations amidst broader financial market turmoil has led to very interesting shifts in forex options risk reversals, and it will be critical to watch short-term moves in key currency pairs. The sharp jump in the USDJPY and commensurate shift in FX options sentiment leaves scope for further short-term gains, but it is interesting to note that the AUDUSD has once again failed to break to fresh highs amidst clear bullish extremes in futures and options sentiment. Suffice it to say, the next several weeks of price action should prove eventful and could decide medium-term trajectory in pairs such as the EURUSD and AUDUSD. 

 
 
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Euro/US Dollar Options Analysis
OWEURUSD
 
Tremendous short-term volatility in the Euro/US Dollar pair has made for similarly sharp moves in forex options risk reversals, making near-term forecasts especially difficult. Bearish extremes in 3-month options build the cause for a short-term rebound, but 1-month options are far less bearish the single currency. Sharply oversold CFTC Non-Commercial positioning arguably builds the case for a rebound, but sentiment can remain extreme for weeks and months at a time. Given such unclear signals, we have little option but to remain bearish the EURUSD on short and medium-term downward momentum.  

British Pound/US Dollar Options Analysis
OWGBPUSD
 
 Forex options markets paint a similarly mixed picture for the British Pound/US Dollar pair, making near-term forecasts fairly difficult. Longer-dated options remain fairly bearish the GBPUSD and risk reversals plainly favor out of the money GBPUSD puts. Yet the recent recovery in CFTC COT Non-Commercial net positioning suggests that many are scaling back bets on continued British Pound strength. We remain neutral the GBPUSD until further notice. 

US Dollar/Japanese Yen Options Analysis
OWUSDJPY
 
Considerably net-long CTFC COT Non-Commercial futures positioning suggests that the USDJPY is increasingly overbought, but the pair’s relative resilience in the face of recent sell-offs suggests that recent USDJPY strength may continue. Forex options market risk reversals likewise show that many have increasingly bet on/hedged against JPY weakness (USDJPY strength), and we have little reason to expect a short-term reversal in the recently high-flying currency pair. 
 

US Dollar/Canadian Dollar Options Analysis
OWUSDCAD
 
At the risk of getting faked out for yet another time, FX Futures and Options positioning leads us to believe that today’s advance may be the start of a bigger correction. Non-commercial futures positioning remains extremely net-long the Canadian Dollar (short the USDCAD), while FX Options risk reversals show that traders are aggressively betting on/hedging against further USDCAD rallies. The combination is enough to suggest that today’s rally could lead to further gains, and leaves this author in the position to buy short-term dips. 


US Dollar/Swiss Franc Options Analysis
OWUSDCHF
 
US Dollar sentiment against the Swiss Franc has improved considerably as of late, with longer-dated options putting a significant premium on out-of-the-money USDCHF calls. Combined with fairly net-long CFTC Non-Commercials futures positioning and general USDCHF strength, there is scope for further short-to-medium-term strength. 

Australian Dollar/US Dollar Options Analysis
OWAUDUSD
 
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. Yet it is difficult to ignore that Non-Commercial futures positioning remains extremely net-long at present, and FX Options have grown fairly bearish through recent trade. We continue to watch the AUDUSD’s failure at recent highs with interest. 
 

New Zealand Dollar/US Dollar Options Analysis
OWNZDUSD
 
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. We are somewhat bearish, but we need a bigger breakdown in price to call for a bigger reversal.    
 
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
 

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30 April 2010 17:38 GMT