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Forex Options Point to Continued US Dollar Losses

Forex Options Point to Continued US Dollar Losses

2010-09-29 22:20:00
David Rodriguez, Head of Product
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FX Options and Futures markets continue to warn of a US Dollar bearish sentiment extreme. Yet we are constantly reminded that sentiment and positioning can remain extreme for extended periods of time, and our FX Options-based forecasts continue to call for US Dollar declines. As futures and options traders bet aggressively on USD weakness, the likelihood of reversal grows. Yet US Dollar-long positions seem ill-advised until we see concrete signs of reversal.

Watch a presentation on how you can use FX Options risk reversals and this report in your swing trades.

Risk Reversals

EUR/USD

GBP/USD

USD/JPY

USD/CAD

USD/CHF

AUD/USD

NZD/USD

1-Week

94.01%

95.65%

91.07%

10.90%

0.63%

96.43%

97.02%

1-Month

100.00%

100.00%

66.23%

11.88%

5.92%

98.19%

98.77%

3-Month

100.00%

95.95%

64.78%

39.13%

5.63%

88.02%

100.00%

12-Month

88.59%

87.74%

76.77%

49.35%

10.14%

65.85%

96.23%

DailyFX Volatility Index Percentiles

Volatility Index

1 Week

2 Weeks

1 Month

3 Months

1 Year

Indices

78.13%

76.92%

72.31%

63.08%

52.38%

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_1.png, Forex Options Point to Continued US Dollar Losses

Euro/US Dollar Options Analysis

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_2.png, Forex Options Point to Continued US Dollar Losses

FX Options show that EURUSD sentiment has remained at bullish extremes for quite some time now, warning of potential reversal. Yet sentiment can remain extreme for extended periods. Two weeks ago we pointed out that the pair has tended to reverse in recent years when our 3-Month Risk Reversal percentile hits 100%. That occurred on September 16; yet the pair has since rallied significantly since. The risk of reversal remains high on the sentiment extreme, but upward momentum makes short positions especially risky through near-term trading.

British Pound/US Dollar Options Analysis

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_3.png, Forex Options Point to Continued US Dollar Losses

Forex options continue to show GBPUSD traders near their most bullish in the past 90 days of trading, and our Breakout-style risk reversals system would have established a long as of September 17—near the 1.5630 mark. Price has since moved a reasonable distance higher, and we see little reason to stray from our previously-bullish bias. It is worth noting that Non-Commercial futures positioning is not at significant extremes. These factors suggest that the GBPUSD could see continued upside through near-term trading.

US Dollar/Japanese Yen Options Analysis

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_4.png, Forex Options Point to Continued US Dollar Losses

The Japanese Yen has almost completely retraced its post-Bank of Japan intervention declines, and overall momentum suggests we could carve out another low. We had previously written that a noteworthy divergence between price and FX Options risk reversals suggested that the USDJPY was near a significant bottom. We still believe that to be the case, but even central bank intervention was not enough to spark a larger rally. USDJPY longs seem ill-advised until we see sustainable signs of upward correction.

US Dollar/Canadian Dollar Options Analysis

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_5.png, Forex Options Point to Continued US Dollar Losses

Our USDCAD bias is largely unchanged from last week: Forex futures data shows that large speculators have bet fairly aggressively on renewed USDCAD weakness, and our benchmark Breakout-style FX Options risk reversals system would have hypothetically gone short as of September 16. Price has since not moved especially far, however, and previous congestion support at 1.0200 has thus far held back further declines. Relatively neutral FX Futures positioning suggests that the USDCAD still has further room to fall, but how the pair trades around 1.0200 will be especially important.

US Dollar/Swiss Franc Options Analysis

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_6.png, Forex Options Point to Continued US Dollar Losses

We have remained bearish the USDCHF for quite some time now, and increasingly bearish sentiment gives us little reason to change in our existing bias. Last week we wrote: Our benchmark Breakout-style FX Options risk reversal system hypothetically went short the USDCHF as of June 18 and has since remained short. Increasingly overextended Forex Futures positioning suggests that the risk of reversal is high, but it is especially risky to bet on retracement when price is hitting fresh lows on a regular basis. We see little reason to deviate from our previous bearish bias.

Australian Dollar/US Dollar Options Analysis

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_7.png, Forex Options Point to Continued US Dollar Losses

Continued bullish sentiment extremes in Australian Dollar Options and Futures sentiment warns of trend exhaustion. Yet with no sign of reversal we have little choice but to retain our standing bullish bias. Last week we wrote: Our Breakout-style risk reversals trading system would have theoretically gone long the AUDUSD from September 3—at which point the Australian Dollar was trading at approximately $0.9166. FX Futures positioning is likewise near its most net-bullish since the pair last traded above the psychologically significant 0.90 mark.

New Zealand Dollar/US Dollar Options Analysis

FX_Options_US_Dollar_Forecast_2010-09-29_body_Picture_8.png, Forex Options Point to Continued US Dollar Losses

Much like with the AUDUSD, we see little reason to deviate from our standing NZDUSD-bullish bias. Our benchmark Breakout-style risk reversal system would have theoretically gone long the NZDUZD as of September 3—at which point the pair was trading at approximately the $0.7210 mark. It is worth pointing out that FX futures positioning is currently at its most extreme since the pair topped near 0.73 through mid-year. Yet momentum favors short-term gains.

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

To be added to this author’s distribution list, send an e-mail subject line “Distribution list” to drodriguez@dailyfx.com

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