Forex futures traders have scaled back their bets on US Dollar strength, and a similar correction in FX Options sentiment suggests that the US Dollar could continue lower through near-term trade. Last week we called for exactly such corrections and the Greenback has indeed pulled back against key counterparts. Yet the most recent USD rally throws future short-term moves into question as FX Options sentiment has similarly corrected. We remain somewhat bearish the US Dollar based on Futures and Options data, but our conviction in such calls has dropped considerably amidst signs of life out of the US currency.
The major caveat is the fact that FX Options market volatility expectations have likewise dropped substantially through recent trade. If said pullback in volatility is the start of a larger summer lull, it may take some time to see any noteworthy USD moves.
Read a how-to guide on understanding our Forex Options Weekly Forecast report or view a video on the same. Discuss outlook for individual currency pairs in our forex forums.
Euro/US Dollar Options Analysis
Forex futures positioning data shows that speculators have significantly scaled back Euro short positions against the US Dollar, while FX Options risk reversals have likewise shown a considerable correction in EURUSD sentiment. Last week we argued that Futures and Options sentiment data pointed to further EURUSD corrections/rallies. We continue to believe that further short position covering could force short-term Euro strength. Yet the conviction with which FX options traders have bet on and hedged against EURUSD strength has waned, and our bias is subsequently less bullish.
British Pound/US Dollar Options Analysis
British Pound FX Options and Futures positioning is quite similar to that of the EURUSD, but continued GBPUSD rallies suggests short-term momentum remains in its favor. Non-Commercial futures positioning saw a noteworthy correction through recent trade, and further short-covering could force GBP strength. FX Options traders have likewise begun to bet on and hedge against GBPUSD strength. The combination of said factors leave us fairly bullish the GBPUSD through short-term trade, and it serves to note that 3 of 6 systems on
DailyFX+ Trading Signals are long at time of writing.
US Dollar/Japanese Yen Options Analysis
FX Futures and Options positioning on the US Dollar/Japanese Yen pair are effectively mixed, giving little indication on what to expect through short-term trading. On the one hand, USDJPY risk reversals have recently recovered from some of their lowest levels in the past calendar year—indicating that short-term gains are likely. Yet on the other, COT Non-Commercials data shows that traders have aggressively closed USDJPY-long positions and gives a slightly bearish short-term bias. Needless to say, we are at a loss to predict short-term moves in the US Dollar/Japanese Yen pair given the conflicting signals from these key markets.
US Dollar/Canadian Dollar Options Analysis
The US Dollar/Canadian Dollar pair has seen fairly large corrections to the topside through the past weeks of trading, coinciding with a similarly large correction in Non-Commercial futures positioning. Most recently, however, the pair has fallen sharply and FX Options data suggests some are betting on and hedging against further weakness. Given the swift shift in risk reversals and relatively neutral FX Futures positioning, we see scope for further short-term declines amidst a much larger downtrend.
US Dollar/Swiss Franc Options Analysis
FX Futures and Options-based forecasts for the US Dollar against the Swiss Franc are quite similar to that of the EURUSD pair; a sharp sentiment shift suggests that the USD could correct further against the downtrodden CHF. Indeed, FX Options risk reversals show that traders are betting on and hedging against further USDCHF weakness. Given heavily one-sided COT Non-Commercial positioning, an unwind in CHF shorts could produce gains. As such, be on the lookout for further short-term USDCHF weakness.
Australian Dollar/US Dollar Options Analysis
The past several weeks have seen substantial Australian Dollar corrections against its US namesake, but a more recent downturn in FX Options Risk Reversals clouds outlook for the AUDUSD pair. Last week we wrote that an aggressive shift in sentiment favored AUD gains, and indeed the AUDUSD recovered further amidst a general improvement in financial market sentiment. The most recent drop in AUDUSD risk reversals nonetheless suggests that some are starting to hedge against and bet on AUD weakness. Our short-term bias is subsequently neutral amidst market indecision.
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. A noteworthy pullback in risk reversals suggests that some have started to bet on and hedge against NZD weakness, and our previously bullish stance is now called into question. FX Futures positioning still shows speculators are heavily net-short the pair, and a bout of short-covering could easily force further NZDUSD rallies. Yet the noteworthy move in risk reversals is a concern, and we have little option but to shift to a fairly neutral bias on the NZD.
