FX Options and futures markets point to further US Dollar and Japanese Yen gains against the Australian and New Zealand Dollars on significant shifts in sentiment and positioning. We have argued that the Australian Dollar remained extremely overbought and likely to pull back sharply for quite some time now. We were clearly early to call for a top, but the most recent breakdown suggests that the AUDUSD has set an important medium-term top and is likely to continue lower.

Forex positioning generally favors US Dollar strength, but the recent EURUSD reversal suggests that a further unwind in speculative positioning could produce further rallies. Sky-high volatility expectations certainly suggest that the next week of price action will continue to produce sizeable currency moves. We continue to urge traders to limit leverage amidst such especially unpredictable market conditions.

Discuss outlook for individual currency pairs in our forex forums.

Euro/US Dollar Options Analysis
Breathtaking Euro declines against the US Dollar came to an abrupt end through recent trade, likely exacerbated by extremely one-sided FX futures positioning. According to CFTC Commitment of Traders data, speculators were a record net-short the EUR/USD through last week’s trading. Similar extremes in FX Options risk reversals suggested that a short-term bottom was likely, and indeed we have seen the EURUSD bounce sharply off of its lows. Though medium-term momentum favors losses, we believe that extremely one-sided FX Options and Futures sentiment may produce further EURUSD rallies through near-term trading.

British Pound/US Dollar Options Analysis
Similarly dramatic declines in the British Pound/US Dollar pair have pushed FX Options risk reversals to bearish extremes. Three-month risk reversals continue near their most negative since the GBPUSD set decade lows in late 2008, and elevated volatility expectations leave scope for further declines. Our benchmark breakout-style risk reversal system called for a short position two weeks ago and remains short. Extremely one-sided futures positioning warns of a bounce, but we will have to see a more substantive price recovery before taking a bullish stance on the GBPUSD.

US Dollar/Japanese Yen Options Analysis
Forex futures positioning and options market sentiment on the US Dollar/Japanese Yen pair are currently at opposite extremes, making short-term forecasts especially difficult on the highly choppy pair. FX options risk reversals clearly show that traders are betting on and hedging against further Japanese Yen strength (USDJPY weakness). Our breakout-style risk reversals system is accordingly short, and we see scope for further losses. 

US Dollar/Canadian Dollar Options Analysis
Dramatic USDCAD advances led to similarly pronounced moves in FX Options market sentiment, leading us to believe that the pair could continue higher through recent trade. We maintain a bullish medium-term bias on the USDCAD as positioning recovers from recent bearish extremes, and recently-sharp rallies only add further conviction to our bullish bias. Our breakout-style risk reversals system remains long the USDCAD.

US Dollar/Swiss Franc Options Analysis
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
We have been caught on the wrong side of the AUD/USD trade an embarrassing number of times now, but the recent tumble gives reason to believe that the Australian Dollar has set a substantial medium-term top through recent trade. Heavily net-long Non-Commercial leaves the Australian Dollar in an overbought position, and the dramatic shift towards out of the money puts gives reason to remain bearish until further notice. Indeed, our benchmark breakout-style trading system called for an AUDUSD short on May 5 and we are accordingly bearish.
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. Overbought Non-Commercial futures positioning leaves the New Zealand Dollar at particular risk of declines as traders unwind their leveraged positions. Our breakout-style risk reversal strategy called for a short on May 5 and we remain bearish accordingly.  
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com