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USDJPY Options Traders Bet on Reversal - Bottoming?

USDJPY Options Traders Bet on Reversal - Bottoming?

2012-01-10 23:30:00
David Rodriguez, Head of Product
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Forex options traders are their most bullish the US Dollar (ticker: USDOLLAR) against the Japanese Yen since at least 2003, warning that the USDJPY may set an important bottom and trade higher through 2012.

We see significant signs of potential US Dollar sentiment extremes across the board, and we expect that the recent period of low trading volatility may be short-lived. Speculative futures traders are their most net-short the Euro against the US Dollar on record, suggesting that the USD could fall on any EURUSD short covering.

Volatility expectations are near their lowest levels since pre-financial crisis 2008, and markets seem incredibly complacent with the current price levels. Such heightened complacency warns that the next moves could be quite large, and we advise caution against increasing trader leverage simply due to slower price moves.

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

100%

96%

13%

1%

2%

85%

83%

1-Month

100%

100%

95%

1%

5%

100%

100%

3-Month

100%

100%

100%

1%

5%

99%

100%

12-Month

100%

100%

100%

15%

49%

100%

97%

DailyFX Volatility Index Percentiles

Volatility Index

1 Week

2 Weeks

1 Month

3 Months

1 Year

Indices

12.50%

12.50%

1.56%

1.56%

4.69%

forex_options_us_dollar_bottom_forecast_body_Picture_1.png, USDJPY Options Traders Bet on Reversal - Bottoming?

US Dollar/Japanese Yen Options Analysis

forex_options_us_dollar_bottom_forecast_body_Picture_2.png, USDJPY Options Traders Bet on Reversal - Bottoming?

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Bullish

FX options traders are their most bullish USDJPY in at least 8 years, suggesting most have been betting on and hedging against Japanese Yen weakness (USDJPY gains). Yet speculative futures traders are heavily net-short USDJPY (long JPY), and current price momentum plainly favors USDJPY weakness.

The real takeaway is that it seems most options traders are unwilling to bet on and hedge against significant USDJPY declines. The fact that the USDJPY has not re-tested pre-intervention lows near the 76 mark suggests that a major bottom may be forming. In this author’s opinion, a long USDJPY trade may be one of the better opportunities in 2012.

Euro/US Dollar Options Analysis

forex_options_us_dollar_bottom_forecast_body_Picture_3.png, USDJPY Options Traders Bet on Reversal - Bottoming?

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

Speculative futures traders are their most net-short the Euro against the US Dollar in history, while FX options traders have aggressively bet on and hedged against EURUSD rallies. All the while, FX Options risk reversals show that traders are their least bearish EURUSD since the pair set an important top near the 1.45 mark.

One thing is clear: speculators are plainly betting on a continued EURUSD downtrend, while hedgers are positioning themselves for a major bounce. The sizeable divergence warns that the Euro is at or near a major sentiment extreme and could soon turn significantly higher.

Of course, sentiment extremes are only clear in hindsight. We advise caution against highly leveraged EURUSD bets in either direction on the heightened uncertainty. This is especially true given extremely low EURUSD volatility expectations; the level of complacency of markets warns that big moves are soon likely.

Australian Dollar/US Dollar Options Analysis

forex_options_us_dollar_bottom_forecast_body_Picture_4.png, USDJPY Options Traders Bet on Reversal - Bottoming?

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Bullish

Both speculative futures traders and FX options markets are betting on and hedging against continued AUDUSD strength, giving us an overall bullish Australian Dollar trading bias. Non-commercial futures traders are now their most net-long AUDUSD since the pair set a significant medium-term top through September 2011. All the while, FX Options traders are their least bearish AUD since the pair set the same high.

Recent trends plainly favor AUDUSD strength, and we could potentially see further sentiment extremes before a larger Aussie Dollar reversal.

British Pound/US Dollar Options Analysis

forex_options_us_dollar_bottom_forecast_body_Picture_5.png, USDJPY Options Traders Bet on Reversal - Bottoming?

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Contrarian Bullish

Speculative futures traders remain net-short the British Pound against the US Dollar, but a noteworthy improvement in FX Options sentiment clouds GBPUSD outlook. Price trends alone suggest that the British Pound could fall further as the GBP trades near multi-month lows.

Yet it’s likewise clear that many have shifted towards betting on and hedging against British Pound strength. As with the Euro, we important risks that the GBPUSD could soon see a sizeable bounce. Yet we can’t responsibly advocate going against the trend until we see legitimate signs of potential reversal.

New Zealand Dollar/US Options Analysis

forex_options_us_dollar_bottom_forecast_body_Picture_6.png, USDJPY Options Traders Bet on Reversal - Bottoming?

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Contrarian Bullish

New Zealand Dollar positioning shows that there is fairly significant room for fresh NZDUSD highs through upcoming trade. Speculative futures traders are basically their least bullish NZD since the pair set a significant bottom through early 2011. All the while, FX Options traders have shifted towards aggressive bets on and hedges against NZD strength.

As with the Australian Dollar, we see current FX futures and options positioning as supportive of further NZDUSD gains.

US Dollar/Swiss Franc Options Analysis

forex_options_us_dollar_bottom_forecast_body_Picture_7.png, USDJPY Options Traders Bet on Reversal - Bottoming?

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Contrarian Bearish

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.

FX Options traders have indeed shifted towards betting on and hedging against USDCHF weakness. On balance, we see risks of an important USDCHF pullback.

US Dollar/Canadian Dollar Options Analysis

forex_options_us_dollar_bottom_forecast_body_Picture_8.png, USDJPY Options Traders Bet on Reversal - Bottoming?

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.

The USDCAD seems unwilling to break to fresh highs, and indeed we thing overall risks favor a break of range lows. FX Options risk reversals likewise show that many have shifted towards betting on and hedging against USDCAD weakness.

--- Written by David Rodriguez, Quantitative Strategist for 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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