US Dollar May Fall Further Against Euro, Australian Dollar
Forex option markets volatility expectations now stand at their lowest levels in nearly two years, pointing to slow currency price moves in the week ahead. We subsequently expect that the US Dollar will remain in a choppy trading range against the Japanese Yen and other key counterparts through upcoming trade. There is distinct risk that the Dollar could break lower against the Euro and continue falling against the Australian Dollar, but low volatility expectations limit the scope for any major moves. It seems that range trading strategies may prevail until further notice.
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DailyFX Volatility Indices
Euro/US Dollar Options Analysis
A sharp pickup in FX Options Risk Reversals suggests that the Euro/US Dollar could bounce through upcoming trade—signaling that many traders are betting on and hedging against further Euro strength. Given that forex futures positioning remains heavily net-short the EUR/USD, any unwind in short positioning could force significant strength. Indeed, the longer the Euro holds its lows the greater chance we see a substantive bounce on technicals alone. The limiting factor remains exceedingly low volatility expectations, but watch for risks of a Euro jump higher.
British Pound/US Dollar Options Analysis
Net speculative positioning on the British Pound is quite similar to that of the Euro, with Non-Commercial traders very much net-short the GBP/USD. Similar one-sided extremes in forex options risk reversals suggest that the GBP/USD may continue to decline through upcoming trade, but every further drop greatly increases the probability of a strong bounce. Indeed, the very recent rebound in price and risk reversals suggests that the GBP will consolidate and/or gain through near-term trading. It will be critical to watch whether the British Pound is able to hold its early-March lows.
US Dollar/Japanese Yen Options Analysis
Forex options market risk reversals on the US Dollar/Japanese Yen pair recently hit bullish extremes and turned lower, leaving risks of short-term pullbacks in the USDJPY. Such a correction would make sense given recent market choppiness and the pair’s apparent refusal to break above longer-term triangle resistance. Despite a progressively narrower trading range, the Japanese Yen shows little willingness to break in either direction. Low volatility expectations leave little hope of any substantive moves through near-term trading.
US Dollar/Canadian Dollar Options Analysis
Forex futures traders remain fairly aggressively long the Canadian Dollar against the US Dollar, and a recent shift in risk reversals shows many are betting on further USDCAD weakness. Some weeks ago we argued that severely one-sided positioning pointed to slower USDCAD declines. Yet positioning has since moderated significantly, and there is arguably further room for the USDCAD to go lower. The sharp shift in risk reversals likewise supports the case for USDCAD weakness. Of course, it will be critical to see whether the pair is able to break multi-year lows at 1.0000.
US Dollar/Swiss Franc Options Analysis
US Dollar sentiment against the Swiss Franc is fairly mixed at the moment, as futures traders remain fairly net-long USDCHF while options traders bet on weakness. Such relative indecision makes it difficult to take a strong stance on the currency pair, and indeed low volatility expectations suggest that the pair may consolidate through near-term trading.
Australian Dollar/US Dollar Options Analysis
The Australian Dollar continues to rally despite heavily one-sided speculative futures positioning—a testament to bullish sentiment on the high-yielding AUD. Forex options risk reversals are likewise bullish, and we see relatively little scope for a short-term turnaround. As recent experience has shown, sentiment can remain extremely one-sided for far longer than one can maintain margin in trading accounts. Caution is advised against short positions until we see a substantive move lower.
New Zealand Dollar/US Dollar Options Analysis
A noteworthy pickup in New Zealand Dollar FX Options Risk Reversals shows many traders are betting on and hedging against NZD strength. Combined with the fact that futures traders have heavily trimmed their one-sided New Zealand Dollar longs through previous declines, we see scope for further short-term NZDUSD strength. As with the Australian Dollar, however, it will be critical to monitor any and all shifts in financial market risk sentiment.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, email@example.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.