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FX Options and Futures positioning shows that forex speculators remain heavily net-short the US Dollar against major currency counterparts, warning against aggressive bets on USD reversals through near-term trade.

CFTC Commitment of Traders data shows that speculators remain heavily net-short the US Dollar against the Euro, British Pound, Canadian Dollar, Swiss Franc, and Australian Dollar. The confluence of potential bearish extremes underlines the strength of the US Dollar downtrend. And though it is tempting to claim that short-term corrections are likely on such one-sided positioning, sentiment extremes are only clear in hindsight and it very challenging to time reversals. We have little choice but to remain bearish the US Dollar until signs of important price turnaround.

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

51.28%

67.63%

26.58%

35.29%

66.90%

74.38%

59.62%

1-Month

75.00%

74.64%

55.03%

30.77%

44.68%

83.65%

70.37%

3-Month

72.73%

90.97%

64.00%

33.77%

35.62%

75.95%

57.89%

12-Month

75.33%

99.25%

61.27%

45.19%

33.78%

79.87%

63.06%

DailyFX Volatility Index Percentiles

Volatility Index

1 Week

2 Weeks

1 Month

3 Months

1 Year

Indices

36.92%

33.85%

10.77%

13.85%

13.85%

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_1.png, Trader Sentiment Points to Further US Dollar Losses

Euro/US Dollar Options Analysis

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_2.png, Trader Sentiment Points to Further US Dollar Losses

The US Dollar has found few friends through recent trade, falling sharply against the Euro while many continue to bet on and hedge against continued weakness. Commitment of Traders data shows Non-Commercial futures positioning at its most net-long the Euro since the pair last traded above the 1.40 mark and reversed. FX Options Risk Reversals likewise show many have shifted towards EURUSD calls over puts through recent price action.

It is difficult to call for continued gains as sentiment increasingly hits bullish extremes, but momentum is plainly in favor of continued Euro/US Dollar strength.

British Pound/US Dollar Options Analysis

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_3.png, Trader Sentiment Points to Further US Dollar Losses

The British Pound/US Dollar pair is increasingly at bullish sentiment extremes, with both Futures and Options positioning heavily in favor of continued strength. Last week we highlighted the fact that Non-Commercial COT positioning was its most net-long since the pair traded above 2.00, and such one-sided sentiment warned a reversal may be near. More recent COT data shows that longs have scaled back slightly in the past week, but the fact remains that we may be increasingly near an important turning point.

It is exceedingly difficult to time sentiment extremes and reversals, and we would need to see an important pullback in price to have any confidence in bearish forecasts. In the meantime we have little choice but to remain short-term bullish the GBPUSD amidst sharply bullish price momentum.

US Dollar/Japanese Yen Options Analysis

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_4.png, Trader Sentiment Points to Further US Dollar Losses

Non-Commercial futures traders have turned heavily net short the Japanese Yen against the US Dollar (net-long the USDJPY), but a more recent decline has left FX Options risk reversals in aggressively bearish territory through later trade. The delay in COT data reporting means that we will not see what speculators have done amidst a sharp USDJPY turn lower until Friday. In the meantime, FX Options are really showing their worth and underlining the recent shift towards bearish bets.

We nonetheless have relatively little conviction in USDJPY forecasts amidst a mixed picture for trader sentiment. The pair remains in a longer-term downtrend, but it seems unwilling to break its multi-month range on market indecision.

US Dollar/Canadian Dollar Options Analysis

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_5.png, Trader Sentiment Points to Further US Dollar Losses

Sharp USDCAD declines have been met with similarly sharp shifts in FX Options and futures sentiment, underlining the extent to which traders are betting on further Canadian Dollar strength. Yet futures show speculators at their most net-short since the pair last set an important bottom and corrected sharply higher thereafter. As with the GBPUSD, we can’t know exactly when we’ve hit a bullish sentiment extreme and when a reversal is likely. Yet it is quite possible that CAD gains (USDCAD declines) will slow as positioning has become sharply one-sided.

US Dollar/Swiss Franc Options Analysis

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_6.png, Trader Sentiment Points to Further US Dollar Losses

The USDCHF continues to hit fresh record-lows amidst aggressive safe haven demand, while COT data shows that speculative sentiment is not necessarily at important extremes. Trend-following Non-Commercial traders are indeed net-long the Swiss Franc against the US Dollar (net-short USDCHF), but they were far more aggressively short when the pair first broke parity through late 2010. The net result is that we cannot reasonably claim that we are near important sentiment extremes, and there is further room to run to the downside.

It is clearly difficult to call for continued losses as a pair hits record lows, but current sentiment and price momentum favors continued USDCHF declines until further notice.

Australian Dollar/US Dollar Options Analysis

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_7.png, Trader Sentiment Points to Further US Dollar Losses

Futures and options show that traders remain heavily net-long and bullish the Australian Dollar against its US namesake. Yet price gains show few signs of slowing, and we are hesitant to claim reversals are likely amidst strong bullish momentum in the AUDUSD pair. Non-commercial futures traders remain near the most net long the AUD since the pair set an important top in mid-2010. Yet this has remained the case for weeks now, and we see no real sign of potential turnaround.

We have little choice but to remain bullish absent a strong shift in price momentum.

New Zealand Dollar/US Options Analysis

FX_Options_and_futures_point_to_us_dollar_losses_body_Picture_8.png, Trader Sentiment Points to Further US Dollar Losses

Sharp swings in New Zealand Dollar sentiment make short-term forecasts especially difficult and underline current market indecision on the future for the choppy NZDUSD. FX Options risk reversals recently saw an important bounce as the NZD corrected higher. Yet a subsequent turn lower forced a similarly sharp move in FX Options, and it seems that traders are now betting on and hedging against further NZD weakness.

Choppy moves in sentiment warn against taking an aggressive short-term stance in the NZDUSD. We remain overall bearish the New Zealand Dollar as it continues to correct from important sentiment extremes set through late 2010.

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

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