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US Dollar Forecast to Rally Further on Shift in FX Options

US Dollar Forecast to Rally Further on Shift in FX Options

2010-03-24 18:30:00
David Rodriguez, Head of Business Development
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A significant US Dollar bounce has unsurprisingly coincided with a jump in forex options volatility expectations, and it seems that FX markets are reaching an important juncture. The overbought US currency was, in our opinion, at clear risk for short-term corrections against the Euro on extremely one-sided sentiment. Yet markets have proven that they are yet willing to buy further into Greenback strength, and we have little reason to fade the Dollar’s impressive momentum. Look for further US Dollar rallies against the Euro and other important forex counterparts.

Read a how-to guide on understanding our Forex Options Weekly Forecast report or view a video on the same. Discuss outlook for individual currency pairs in our forex forums.

OPT324a

DailyFX Volatility Indices

OPT324b

Euro / US Dollar Options Analysis

OPT324c

A dramatic turnaround in Forex Options Risk Reversals suggests that Euro/US Dollar declines may continue into the near future, leaving momentum firmly to the downside. Last week we said that depressed forex options volatility expectations implied that the EURUSD would likely stick to its range and bounce off its lows. Yet the sudden jump in realized and implied vols leaves risks for further currency moves. As far as futures positioning is concerned, Non-Commercials still remain heavily net-short EUR/USD but less so than last week—leaving space for further USD gains.

British Pound / US Dollar Options Analysis

OPT324d

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, and momentum remains firmly to the downside. Watch for further GBP declines through near-term trading.

US Dollar / Japanese Yen Options Analysis

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Forex options market risk reversals on the US Dollar/Japanese Yen pair are once again at bullish extremes, underlining the strong shift to sell the JPY. There are two ways to interpret the current FX Options sentiment extremes: the USDJPY is either at risk for pullback or can remain overbought for longer. Given the severity of the recent move, we think that short-term risks remain to the topside. Broader US Dollar momentum may just be enough to push the USDJPY through upcoming trade.

US Dollar / Canadian Dollar Options Analysis

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Forex futures traders remain very aggressively long the Canadian Dollar against the US Dollar (short USDCAD), but a substantial shift in FX Options risk reversals show that many are headed for the exits. Any bouts of short-covering could easily force further USDCAD pullbacks and it seems now may be a good time to exit USDCAD short positions. It is perhaps early to call for an outright reversal, but further US Dollar strength could easily force the correction many have been waiting for.

US Dollar / Swiss Franc Options Analysis

OPT324g

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, but our general forecast for US Dollar strength leaves a modestly bullish bias for the USDCHF.

Australian Dollar / US Dollar Options Analysis

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The Australian Dollar remains very heavily overbought by Forex Futures Non-Commercial traders, but a recent pullback in risk reversals suggests that this could be the start of a bigger pullback. Of course, we have been caught short at exactly the wrong times on the AUDUSD and we admittedly hesitate to make a more brazen prediction. Yet if broader US Dollar strength holds up/continues, any AUD-long covering could force fairly substantive AUDUSD pullbacks.

New Zealand Dollar / US Dollar Options Analysis

OPT324i

New Zealand Dollar Risk Reversals show that many traders have aggressively hedged against further NZDUSD strength, and our short-term bias subsequently remains to the downside. Unlike the AUDUSD, however, Futures positioning is not overwhelmingly long the New Zealand Dollar. This leaves perhaps less scope for substantial NZD pullbacks on long-covering, but our bias nonetheless favors further losses.

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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