Intensely choppy forex market price action has made short-term US Dollar forecasts especially difficult, but evidence of sentiment extremes in the Japanese Yen suggests that the USDJPY may soon reverse. Forex futures positioning data shows that Non-commercial traders are near the most net-long the Japanese Yen (short USDJPY) since the USDJPY bottomed in late 2009. The opposite sentiment extreme in FX Options data suggests that some have begun betting on and hedging against Japanese Yen weakness—making us overall bullish the USDJPY.
Of note, said analysis likewise reaches a similar conclusion to our Senior Strategist Jamie Saettele’s Elliot Wave counts on the USDJPY pair.
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Risk Reversals | |||||||
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EUR/USD |
GBP/USD |
USD/JPY |
USD/CAD |
USD/CHF |
AUD/USD |
NZD/USD |
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1-Week |
70.99% |
77.85% |
81.71% |
15.69% |
4.61% |
57.89% |
75.60% |
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1-Month |
58.17% |
78.57% |
42.58% |
50.00% |
3.31% |
53.01% |
56.10% |
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3-Month |
39.10% |
63.09% |
44.72% |
52.53% |
3.82% |
50.59% |
54.44% |
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12-Month |
39.60% |
67.53% |
65.82% |
58.06% |
4.08% |
51.53% |
59.21% |
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DailyFX Volatility Index Percentiles | |||||||
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Volatility Index |
1 Week |
2 Weeks |
1 Month |
3 Months |
1 Year | ||
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Indices |
42.86% |
46.15% |
47.69% |
44.62% |
48.39% | ||
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Euro/US Dollar Options Analysis |
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Intensely choppy Euro/US Dollar price action has made forecasting the pair’s next moves especially challenging, and indecisive FX Options and Futures positioning gives few clues what to expect through upcoming trade. Last week we wrote that a sharp upward correction in FX Options risk reversals pointed to further Euro gains. Yet that was clearly short-lived as the single currency gave back much of its advance through subsequent trade. Given such market indecision, we will stick to the sideline until there is clarification in sentiment. |
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British Pound/US Dollar Options Analysis |
 Similarly choppy moves in GBPUSD risk reversals leave us at somewhat of a loss on what to expect next. We have called for GBPUSD weakness for some time now, but the sudden improvement in sentiment gives reason for pause. Though we’re not ready to turn bullish just yet, we may need to wait for further clarification in sentiment before taking a strong stance on the GBP. |
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US Dollar/Japanese Yen Options Analysis |
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We maintain that the Japanese Yen may have reached a major bullish sentiment extreme against the US Dollar. Non-commercial futures traders are near their most net-long JPY (short USDJPY) since it bottomed in late 2009, and FX Options traders have begun to hedge against USDJPY strength. The key question is whether price can or will register a new low before making a larger bounce. It is very risky to buy into such bearish momentum, but there a USDJPY break above 85.25 may signal a larger correction is underway. |
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US Dollar/Canadian Dollar Options Analysis |
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A substantial shift in Non-Commercial Futures positioning on the Canadian Dollar warns of a broader shift in USDCAD sentiment. Speculative futures traders are net-short Canadian Dollars (long USDCAD) for the first time since the pair traded near the C$1.10 mark. There is considerable divergence with FX Options sentiment, however; it seems that many traders have bet on and hedged against Canadian Dollar strength (USDCAD weakness). On the margins we would argue that the flip in futures positioning leaves the overall market bias slightly bullish, but it is difficult to reconcile this with FX Options sentiment. |
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US Dollar/Swiss Franc Options Analysis |
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Our USDCHF trading bias remains largely unchanged for the past several weeks. FX Futures positioning shows non-commercial traders heavily net-long the Swiss Franc (short USDCHF), while FX Options traders have similarly bet on and hedged against USDCHF weakness. The most recent pullback in risk reversals suggests declines could slow, but this is hardly a consequential shift in the context of aggressive Swiss Franc strength. |
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Australian Dollar/US Dollar Options Analysis |
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Aggressive Australian Dollar strength has been met with similarly large moves in FX Options risk reversals, and it seems momentum plainly favors further AUDUSD gains. There is something to be said for such one-sided positioning. On the one hand, large net-long futures positions leave risk of sharp declines if traders suddenly close their leveraged positions. On the other, there is no clear sign that such an event will occur through near-term trade. We’re left with little option but to wait for a clarification in sentiment and remain bullish. |
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New Zealand Dollar/US Dollar Options Analysis |
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Futures positioning shows that Non-commercial traders pulled back New Zealand dollar long positions in the past week of trade, but continued highs in FX Options risk reversals shows many continue to bet on and hedge against NZDUSD strength. Much like with the Australian Dollar, there is clear risk that the currency pair will soon reverse. Yet there is little indication that such a reversal will happen through the next week or so, and we remain bullish until further notice. |
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
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