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FX Options Sentiment Shows Early Signs of US Dollar Reversal

FX Options Sentiment Shows Early Signs of US Dollar Reversal

2010-07-21 15:19:00
David Rodriguez, Head of Product
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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.

WO-07-07-21-01

Euro/US Dollar Options Analysis

WO-07-07-21-02

A noteworthy pullback in the Euro/US Dollar pair has been met with similarly sharp shifts in FX Options risk reversals, clouding short-term outlook for the previously high-flying currency pair. Last week we wrote that a major move towards Euro buying across FX Futures and Options markets pointed to further gains. Yet extreme market choppiness has made short-term price moves especially difficult to time, and the sharp correction clouds our outlook. The previous months’ shift towards Euro buying leaves our bias weakly bullish, but that could easily shift if FX Options risk reversals show a further deterioration in sentiment.

British Pound/US Dollar Options Analysis

WO-07-07-21-03

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 weakens our previously-bullish bias for the GBPUSD. Our breakout-style trading system theoretically went long the pair as of June 14 as the 1-week risk reversal hit its highest level in the previous 90 days. That same system would have closed that long position as of yesterday, July 20, as the percentile dropped below the 70% mark. Our bias is subsequently weakly bullish, but a further correction in risk reversals could make us bearish.

US Dollar/Japanese Yen Options Analysis

WO-07-07-21-04

Forex options market sentiment has been very inconsistent on the US Dollar/Japanese Yen pair. Sharply choppy price action has led to similarly sharp swings in risk reversals, and such indecision gives few clues on what to expect next out of the USDJPY. Forex Futures markets show that Non-Commercial traders—most often speculative in nature—remain quite heavily net-short the US Dollar against the Japanese Yen. If nothing else, the risk of short covering gives us a very modestly bullish bias. Yet we would hardly place aggressive trades on any such hunches.

US Dollar/Canadian Dollar Options Analysis

WO-07-07-21-05

Forex futures options sentiment on the US Dollar/Canadian Dollar has been quite choppy as of late, as sharply rangebound price action underlines trader indecision. Last week we wrote that the sharp shift towards bets on and hedges against USDCAD weakness (Canadian Dollar strength) pointed to further declines, but a considerable correction has compromised said forecast. As it stands it is difficult to establish a strong bias in the pair; both FX Futures and Options sentiment remain quite near neutral.

US Dollar/Swiss Franc Options Analysis

WO-07-07-21-06

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. Dramatic weakness leaves clear risk of short-term corrections, but it seems that the tide has turned in favor of continued CHF appreciation (USDCHF declines).

Australian Dollar/US Dollar Options Analysis

WO-07-07-21-07

Our short-term bias for the Australian Dollar/US Dollar pair is unclear as mixed sentiment and intensely choppy price action makes it difficult to establish any short of conviction in short-term forecasts. Just several weeks ago we had called for declines amidst a sharp shift towards bets on and hedges against further Australian Dollar weakness. Yet a dramatic turnaround in the AUDUSD has pushed risk reversals significantly higher. If anything, the sharp shift towards bets on/hedges against AUDUSD strength leaves us in favor of short-term rallies. Yet we hesitate to switch direction after having previously called for aggressive declines.

New Zealand Dollar/US Dollar Options Analysis

WO-07-07-21-08

Extremely choppy price action in the New Zealand Dollar/US Dollar pair is making short-term forecasts especially difficult. Two weeks ago we wrote that a substantive shift towards bets on/hedges against NZDUSD weakness signaled further declines were likely. More recently those same risk reversals have bounced considerably from their lows. Given such market indecision, we will remain in “wait and see” mode on the NZD until further notice.

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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