Noteworthy US Dollar declines have been met with similarly aggressive bets on and hedges against further USD weakness, and our short-term trading bias has accordingly turned bearish the US currency. Last week we wrote of a sharp shift in FX Options risk reversals in the British Pound/US Dollar and US Dollar/Japanese Yen pairs—calling for further Greenback weakness. Those same risk reversals now point to Euro strength against the suddenly-downtrodden dollar, and a jump in overall FX market volatility expectations suggests we may see big moves in the days ahead.
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Euro/US Dollar Options Analysis
Sharp Euro rallies against the US Dollar have been met with similarly aggressive shifts in FX Options market risk reversals. Our benchmark breakout-style trading system theoretically went long the pair as of June 11 as the 1-week risk reversal hit its highest highs of the previous 90 days. Suffice it to say that trade has theoretically worked out quite well, but in fairness last week’s options report expressed a very weak bullish bias and we cannot take credit for such a move. As it stands, risk reversals clearly favor further gains yet the risk of short-term corrections is high. We will subsequently look to buy dips on the resurgent EURUSD pair.
British Pound/US Dollar Options Analysis
Continued surges in the British Pound have been met with similarly aggressive moves in FX Options Risk Reversals, and our benchmark breakout-style system hypothetically went long the pair as of June 14. Said system has hypothetically done very well with the British Pound in recent history, and last week we wrote that we remained bullish the pair until further notice. As we wrote previously, the risk of short-term corrections grows as the pair appreciates further. Yet outlook remains bullish on the clear shift towards bets on/hedges against British Pound strength against the USD.
US Dollar/Japanese Yen Options Analysis
Forex options sentiment has recently turned in favor of further USDJPY losses, leaving short-term momentum to the downside. The pair’s break below the psychologically significant 90.00 mark seems to have encouraged many to hedge against and bet on further USDJPY weakness. Though our risk reversal percentiles are still a noteworthy distance from bearish extremes, overall momentum and FX Futures positioning favors continued Japanese Yen gains (USDJPY losses). We remain cautiously bearish and may look to sell rallies through upcoming trade.
US Dollar/Canadian Dollar Options Analysis
Volatile and choppy price action in the US Dollar/Canadian Dollar pair has made for similarly indecisive shifts in FX Futures and Options sentiment, making short-term forecasts difficult to establish. The pair’s recovery from multi-year lows had previously left us firmly in favor of medium-term USDCAD gains (Canadian Dollar losses). Yet the more recent sharp correction to the downside gives us pause, and the USDCAD’s next moves are admittedly unclear. We will remain in “wait and see” mode until we see clarification in sentiment and trends.
US Dollar/Swiss Franc Options Analysis
Dramatic Swiss Franc advances (USDCHF declines) have left FX Options risk reversals plainly in favor of further USDCHF losses. Our benchmark breakout-style FX Options risk reversals system would have gone short the USDCHF as the 1-week 25-Delta Risk Reversal hit its lowest levels in the previous 90 days on June 14. Dramatic weakness leaves clear risk of short-term corrections, but it seems that the tide has turned in favor of continued CHF appreciation (USDCHF declines).
Australian Dollar/US Dollar Options Analysis
Our short-term bias for the Australian Dollar/US Dollar pair is unclear as mixed sentiment and intensely choppy price action makes it difficult to establish any short of conviction in short-term forecasts. The pair’s very recent dramatic downturn suggests that momentum favors continued near-term losses. Yet neither FX options risk reversals or Futures positioning show any real clues as far as sentiment is concerned. We may need to wait until further clarification before making any calls on the short-term trajectory for the AUDUSD.
New Zealand Dollar/US Dollar Options Analysis
Extremely choppy price action in the New Zealand Dollar/US Dollar pair is making short-term forecasts especially difficult. Last week we wrote that a substantive shift towards bets on/hedges against NZDUSD weakness signaled further declines were likely. More recently those same risk reversals have bounced considerably from their lows. Given such market indecision, we will remain in “wait and see” mode on the NZD until further notice.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
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