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US Dollar Likely to Fall versus Euro Through Late December

US Dollar Likely to Fall versus Euro Through Late December

2011-12-07 21:30:00
David Rodriguez, Head of Product
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Forex futures traders remain extremely net long the US Dollar (ticker: USDOLLAR) against the Euro and other currencies, warning that the EURUSD could trade higher as traders unwind positions into end-of-year trading.

CFTC Commitment of Traders data recently showed speculators their most net-short EURUSD since the pair bottomed near $1.20 in 2010. Though this hardly guarantees that the currency pair will bounce, speculators often unwind positions into late December trading and could put upward pressure on the Euro against the US Dollar.

Indeed, we see fairly significant risks that the US Dollar could trade lower across the board into slower end of year trading.

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

90.91%

98.72%

51.85%

19.54%

45.24%

92.05%

94.44%

1-Month

97.67%

49.38%

96.34%

36.59%

53.66%

94.44%

93.26%

3-Month

88.89%

27.27%

97.59%

42.86%

75.28%

90.80%

92.05%

12-Month

56.41%

19.48%

100.00%

41.25%

63.10%

62.92%

77.27%

DailyFX Volatility Index Percentiles

Volatility Index

1 Week

2 Weeks

1 Month

3 Months

1 Year

Indices

10.77%

9.38%

4.62%

6.15%

43.08%

forex_futures_cot_options_us_dollar_forecast_body_Picture_1.png, US Dollar Likely to Fall versus Euro Through Late December

Euro/US Dollar Options Analysis

forex_futures_cot_options_us_dollar_forecast_body_Picture_2.png, US Dollar Likely to Fall versus Euro Through Late December

Net Non-Commercial COT Futures Positioning (rhs)

1-Week Risk Reversal Percentile (lhs)

3-Month Risk Reversal Percentiles (lhs)

FX Options trading bias: Contrarian Bullish

Extremely bearish Euro/US Dollar sentiment warns that the Euro may have set an important bottom at the 1.32 mark, favoring strength into year-end. CFTC Commitment of Traders data shows that speculators are the most net-short EURUSD since the pair set a significant bottom at 1.20 through mid-2010. Commercial traders are the most net-long they have ever been, and sentiment warns that a correction may be imminent.

We often see speculators shed leveraged positions before the holiday season and beginning of the New Year. Given that they were heavily net-short EURUSD as of last week’s report, we might expect short covering to push the EUR higher into the final weeks of December.

US Dollar/Canadian Dollar Options Analysis

forex_futures_cot_options_us_dollar_forecast_body_Picture_3.png, US Dollar Likely to Fall versus Euro Through Late December

Net Non-Commercial COT Futures Positioning (rhs)

1-Week Risk Reversal Percentile (lhs)

3-Month Risk Reversal Percentiles (lhs)

FX Options trading bias: Bearish

CFTC Commitment of Traders data recently showed that Non-Commercial trades remained near their most net-long USDCAD since 2009—at which point the USDCAD set an important high near the C$1.20 mark and continued lower.

Already we’ve seen the USDCAD pull back significantly off of recent peaks near the C$1.0500 mark, and the question now becomes whether we can expect further corrections through upcoming trade.

To that end, we note that our proprietary Speculative Sentiment Index data shows that the number of retail traders long USDCAD outnumber those short by a noteworthy 2 .7 to 1. Such one-sided positioning gives us contrarian signal that the pair may continue lower.

Australian Dollar/US Dollar Options Analysis

forex_futures_cot_options_us_dollar_forecast_body_Picture_4.png, US Dollar Likely to Fall versus Euro Through Late December

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Bullish

FX options traders have grown increasingly bullish the Australian Dollar against its US namesake, favoring further near-term rallies. CFTC Commitment of Traders data nonetheless shows that speculative traders are at their least bullish AUDUSD since it set a significant bottom near the 0.9700 mark.

The sharp divergence suggests that the Australian Dollar has further room to run to the topside into year-end. We remain bullish until further notice.

British Pound/US Dollar Options Analysis

forex_futures_cot_options_us_dollar_forecast_body_Picture_5.png, US Dollar Likely to Fall versus Euro Through Late December

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Contrarian Bullish

Relatively bearish British Pound trader positioning suggests most believe the GBPUSD will continue to trade lower into the coming months of trading. Yet a noteworthy bounce in FX Options supports calls for near-term strength in what is shaping up to be a quiet month of December.

Indeed, it seems as though the GBPUSD may have further room to rally as traders cover short positions. We remain modestly bullish through the month of December.

New Zealand Dollar/US Options Analysis

forex_futures_cot_options_us_dollar_forecast_body_Picture_6.png, US Dollar Likely to Fall versus Euro Through Late December

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

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 was recently near its most bearish since the pair set a significant bottom near $0.65 in early 2010. CFTC Commitment of Traders data likewise showed that traders have aggressively pared bets on NZDUSD strength.

The combination showed that the pair was likely to correct significantly off of its lows. Indeed, we’ve seen a major bounce, and there’s a reasonable chance the NZDUSD could continue trading higher.

US Dollar/Japanese Yen Options Analysis

forex_futures_cot_options_us_dollar_forecast_body_Picture_7.png, US Dollar Likely to Fall versus Euro Through Late December

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Bullish

Noteworthy USDJPY strength has been met with a similar shift in FX Options risk reversals, and current positioning suggests the US Dollar set an important bottom against the Japanese Yen. CFTC Commitment of Traders data shows that large speculators are heavily net-long the Japanese Yen (short the USDJPY).

Given the sudden shift in direction, we might expect a continued unwind in USDJPY short positions to push it higher through the end of the year.

US Dollar/Swiss Franc Options Analysis

forex_futures_cot_options_us_dollar_forecast_body_Picture_8.png, US Dollar Likely to Fall versus Euro Through Late December

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Bullish

Futures traders remain aggressively net-long the US Dollar against the Swiss Franc, and the potential sentiment extreme warns that the pair could soon turn lower.

Large speculators are very bullish the US Dollar against all except the Japanese Yen. This in itself hardly guarantees that the USD could turn lower. Yet the fact that positioning remains so one-sided warns the US currency could fall if traders begin to scale back positions ahead of illiquid end-of-year trading.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

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

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