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Australian Dollar, Euro may Bottom Against US Dollar

Australian Dollar, Euro may Bottom Against US Dollar

2011-09-14 16:00:00
David Rodriguez, Head of Product
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FX Options risk reversals are now their most bearish EURUSD in at least 7 years, and such extremely one-sided sentiment has frequently coincided with noteworthy short-term bottoms. Past performance is clearly no guarantee of future results, but recent history warns that the EURUSD could see at least a modest bounce.

The same studies show FX Options risk reversals at their most bearish AUDUSD since it bottomed near $0.60 in 2008, while GBPUSD sentiment is at its most bearish since similar bottoms in 2010. There seems to be heightened risk of a near-term US Dollar pullback.

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

52.38%

6.35%

77.78%

62.30%

96.72%

4.84%

4.76%

1-Month

17.46%

5.66%

74.14%

79.66%

100.00%

1.59%

1.56%

3-Month

12.31%

5.26%

58.33%

85.00%

100.00%

1.61%

1.61%

12-Month

12.28%

6.56%

31.67%

98.21%

100.00%

4.84%

3.28%

DailyFX Volatility Index Percentiles

Volatility Index

1 Week

2 Weeks

1 Month

3 Months

1 Year

Indices

72.31%

76.92%

83.08%

89.23%

95.24%

forex_options_australian_dollar_euro_body_Picture_1.png, Australian Dollar, Euro may Bottom Against US Dollar

Euro/US Dollar Options Analysis

forex_options_australian_dollar_euro_body_Picture_2.png, Australian Dollar, Euro may Bottom Against US Dollar

FX Options trading bias: Contrarian Bullish

EURUSD FX Options Risk Reversals recently hit their most bearish in at least 7 years, showing clear warning that the pair may be at an important short-term bearish extreme. Such tumbles in the 3-month risk reversal had previously called short-term bottoms. We were admittedly early in calling for a near-term bounce last week, but the early-week EUR bounce suggests it may have set a noteworthy short-term bottom.

CFTC Commitment of Traders data shows Non-commercial traders grew sharply net-short for the first time since January lows. The combined sentiment extremes warn of near-term EUR rallies.

Australian Dollar/US Dollar Options Analysis

forex_options_australian_dollar_euro_body_Picture_3.png, Australian Dollar, Euro may Bottom Against US Dollar

FX Options trading bias: Contrarian Bullish

Australian Dollar risk reversals are now at their most bearish since the pair set a significant bottom near the $0.60 mark in early 2008, warning of a potential bearish sentiment extreme. All the while, CFTC Commitment of Traders data actually shows traders are strongly net-long. The strong disconnect between options and futures sentiment is difficult to explain.

We consistently warn that sentiment extremes are only clear in hindsight. Yet it is difficult to ignore such extremely one-sided options sentiment, and traders should remain cautious amidst heightened risks of an AUDUSD bounce.

British Pound/US Dollar Options Analysis

forex_options_australian_dollar_euro_body_Picture_4.png, Australian Dollar, Euro may Bottom Against US Dollar

FX Options trading bias: Bearish

We recently highlighted the fact that a sharp downturn in GBPUSD options sentiment warned that the pair could break below its multi-month range. And indeed, the British Pound has now fallen sharply across the board. Options traders are now at their most bearish GBPUSD since late 2010, while CFTC COT data shows Non-Commercial positioning is modestly net-short.

The pair has now broken below what we called a make-or-break level at 1.60. Overall sentiment favors selling rallies, but it seems like the USD may be headed for a short-term decline across the board. Watch for a GBPUSD bounce before further declines.

New Zealand Dollar/US Options Analysis

forex_options_australian_dollar_euro_body_Picture_5.png, Australian Dollar, Euro may Bottom Against US Dollar

FX Options trading bias: Contrarian Bullish

The New Zealand dollar remains in an unsurprisingly similar position as that of the Australian Dollar. NZDUSD options sentiment is now near its most bearish since the pair set a significant bottom near $0.65 in early 2010, while Commitment of Traders data shows speculators remain heavily net-long the New Zealand Dollar against its US namesake.

Overall the short-term looks relatively bullish for the NZD. The same caveat is nonetheless the Dow Jones Industrial Average and other key assets: the correlation between the NZDUSD and the Dow leaves it especially susceptible to any sudden declines in stock markets.

US Dollar/Japanese Yen Options Analysis

forex_options_australian_dollar_euro_body_Picture_6.png, Australian Dollar, Euro may Bottom Against US Dollar

FX Options trading bias: Contrarian Bullish

The USDJPY has shown very mixed sentiment readings as of late, refusing to break above range highs despite warnings of potential reversal. We recently pointed out that CFTC Commitment of Traders data recently showed Non-commercial traders near their most JPY-bullish extreme (USDJPY-bearish) since the pair set an important bottom in 2008.

It is always critical to note that sentiment extremes are only clear in hindsight. In theory the bullish shift in risk reversals and one-sided futures positioning should support near-term USDJPY strength. Yet it seems the pair may remain stuck in its recent range until further notice.

US Dollar/Swiss Franc Options Analysis

forex_options_australian_dollar_euro_body_Picture_7.png, Australian Dollar, Euro may Bottom Against US Dollar

FX Options trading bias: Bullish

Recent Swiss National Bank currency market intervention serves to confirm our preceding bullish bias. Obviously we couldn’t have predicted that the central bank would intervene, but sometimes it’s better to be lucky than good.

The USDCHF 3-month risk reversal previously hit its most bearish since the pair first broke below SFr1.10 in 2009 and has since reversed. They are now in the exact opposite camp at their most bullish since the pair set a significant top through mid-2010. Short-term direction is relatively unclear. Yet it remains fairly certain that the USDCHF set an important bottom through recent trade.

US Dollar/Canadian Dollar Options Analysis

forex_options_australian_dollar_euro_body_Picture_8.png, Australian Dollar, Euro may Bottom Against US Dollar

FX Options trading bias: Bullish

USDCAD FX Options sentiment has improved modestly as the pair bounces off of range lows. CFTC Commitment of Traders data shows that Non-commercial positioning is effectively neutral, and we see no clear signs that the pair is likely to break beyond its recent trading range.

It is difficult to establish a strong trading bias amidst such pronounced choppiness. The recent trend towards USDCAD strength gives us a modestly bullish bias. Yet the pair could just as easily reverse at recent range highs.

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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