US Dollar Sentiment Shift Points to Continued Gains

Risk Reversals

EUR/USD

GBP/USD

USD/JPY

USD/CAD

USD/CHF

AUD/USD

NZD/USD

1-Week

66.67%

81.25%

25.61%

63.40%

10.56%

25.88%

22.62%

1-Month

78.57%

83.77%

29.56%

60.26%

4.14%

33.74%

31.48%

3-Month

55.19%

61.84%

30.25%

62.58%

1.97%

34.50%

33.53%

12-Month

41.45%

63.64%

41.25%

60.81%

1.37%

37.20%

51.97%

DailyFX Volatility Index Percentiles

Volatility Index

1 Week

2 Weeks

1 Month

3 Months

1 Year

Indices

34.92%

25.40%

17.19%

17.19%

17.74%

Euro/US Dollar Options Analysis

A noteworthy pullback in the Euro/US Dollar pair has been met with similarly sharp shifts in FX Options risk reversals, and a previous build in futures positioning suggests that an unwind could produce further losses. Our benchmark trend-following risk reversals system theoretically went long the EURUSD as recently as July 7, but a subsequent correction left it flat as of yesterday August 10. The swiftness with which sentiment has shifted warns of further corrections, and we have subsequently turned bearish the EURUSD through short-term trading.

British Pound/US Dollar Options Analysis

Our short-term trading bias for the British Pound/US Dollar pair is quite similar to that of the EURUSD, as a noteworthy correction in FX Options sentiment makes us short-term bearish the GBPUSD. Our trend-following trading system theoretically went long the pair as recently as August 3, but the most recent correction leaves that same system flat. The recent build in GBPUSD-long Futures positions warns that sentiment grew altogether too bullish the GBP, and the correction in sentiment could lead to further corrections in price through short-term trading.

US Dollar/Japanese Yen Options Analysis

Continued US Dollar losses against the Japanese Yen have left Non-Commercial futures positioning at its most bearish since the USDJPY bottomed in late 2009. Yet comparatively neutral FX Options positioning gives few clues on short-term direction for the fast-falling pair. It is perhaps surprising to note that speculators and hedgers are not taking aggressive bets that the USDJPY will bounce off of the psychologically significant 85 mark. Such inaction warns that the pair could very well break lower, and we remain bearish until further notice.

US Dollar/Canadian Dollar Options Analysis

An aggressive shift in US Dollar/Canadian Dollar FX Options risk reversals suggests that the USDCAD’s recent downtrend has come to an abrupt end. Our benchmark trend-following trading system theoretically went short the pair as of August 4, but the most recent correction in risk reversals means that it will likely close said position once the day is through. Unlike the EURUSD and GBPUSD, however, futures positioning did not necessarily hit any major extremes. As such, our short-term USDCAD bias is only mildly bullish and the pair could very well consolidate through short-term trade.

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. The most recent correction clearly warns that the pair could reverse course, but our breakout system will wait until the Risk Reversals percentile climbs back above the 30th percentile to close said short position. Until then, we remain modestly bearish the USDCHF.

Australian Dollar/US Dollar Options Analysis

A noteworthy build in Non-Commercial futures traders AUDUSD long positions leaves the pair at clear risk for corrections, and the most recent downturn in FX Options risk reversals warns that the pair could continue lower through short-term trade. CFTC Commitment of Traders data most recently showed that speculators were the most net-long AUDUSD since the pair traded near the 0.90 mark in early May. FX Options sentiment likewise grew quite bullish, but the most recent turn lower suggests many are now exiting their bets and hedges on AUD strength. We subsequently remain short-term bearish the AUD until further notice.

New Zealand Dollar/US Dollar Options Analysis

Our outlook for the New Zealand Dollar/US Dollar pair is quite similar to that of the AUDUSD, as a sharp build in NZD-long futures positioning leaves the pair at clear risk of further corrections. Combined with a noteworthy turn lower in FX Options risk reversals, we believe that many speculators are now looking to close many of their long positions through short-term trade. Such a covering of overextended longs could force continued NZDUSD declines.