Forex options and CME futures data show that anti-US Dollar sentiment continues to register impressive extremes, and it is increasingly a question of ‘when’ and not ‘if’ the USD will post a noteworthy correction. Indeed, CME data shows that traders remain the most heavily net-short the Greenback since early 2008—at which point the dollar set an important bottom against the Euro and other key currencies. Of course, the timing of such a move is far from clear; we will need to see signs of noteworthy price reversal before calling for a sustained USD rally.
Forex options and CME futures data show that anti-US Dollar sentiment continues to register impressive extremes, and it is increasingly a question of ‘when’ and not ‘if’ the USD will post a noteworthy correction. Indeed, CME data shows that traders remain the most heavily net-short the Greenback since early 2008—at which point the dollar set an important bottom against the Euro and other key currencies. Of course, the timing of such a move is far from clear; we will need to see signs of noteworthy price reversal before calling for a sustained USD rally.
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Our DailyFX Volatility indices are at the bottom of their medium-term ranges and continue trending lower, leaving little room for substantial currency moves through the foreseeable future. Said developments suggest that we can expect major pairs to stick within long-standing trading ranges, which in and of itself would support the case for a USD bounce. It will nonetheless be critical to watch whether the Dollar can hold key range lows against the Euro and other pairs.
[B]Euro/US Dollar Options Analysis
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The Euro continues to climb to fresh multi-month peaks and speculative positioning now shows traders are the most net-long the EURUSD since early 2008. Indeed, CME Futures data shows that Non-Commercial traders aggressively bought the Euro through last week’s trade. Forex options markets data has, perhaps surprisingly, not registered similar sentiment extremes. The divergence suggests that options traders are less concerned with persistent EURUSD strength. We maintain that the pair could see a substantial reversal, but the timing of said move remains extremely challenging.
[B]British Pound/US Dollar Options Analysis
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British Pound speculative positioning remains similarly overextended, and our overall trading bias on the GBPUSD is similar to that of the EURUSD. Commitment of Traders futures data shows that Non-Commercial traders are essentially the most net-long the GBPUSD since the currency pair traded above 2.00. Yet forex options risk reversals are substantially less bullish, implying that options traders are less fearful of a sustained break higher. Of course, the devil is in the details; we will need to see signs of noteworthy price reversal before calling for a GBPUSD top.
[B]US Dollar/Japanese Yen Options Analysis
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FX Options and Futures markets show noteworthy divergence on the USDJPY, and mixed signals cloud our trading bias on the risk-sensitive pair. Non-commercial futures traders are now the most net-long the Japanese Yen since February—at which point the USDJPY traded at approximately 92.00. Typically these non-commercial traders are trend-followers, and it is surprising that they would be so net-short the USDJPY as it has recently rallied. FX Options, by comparison, shows that sentiment is nearing bullish extremes. If anything, said divergence suggests a near-term pullback is likely.
[B]US Dollar/Canadian Dollar Options Analysis
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Traders have grown extremely net-long the Canadian dollar (short the USDCAD) through recent trade, with FX Futures data showing sentiment at its most bullish since the pair traded near parity. Forex options markets likewise show that traders are increasingly betting on USDCAD weakness—emphasizing that sentiment remains extremely bearish. Given such headwinds, we believe that a noteworthy correction is likely. Yet, as is well-documented, sentiment extremes are especially difficult to time; we will need to wait for price to show reversal potential before calling for a bigger move.
[B]US Dollar/Swiss Franc Options Analysis
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Our Forex Options and Futures sentiment-based forecast for the Swiss Franc is currently unclear, as the two markets show mixed signals for the USDCHF. Non-commercial futures traders remain extremely net-long the Swiss Franc (net-short the USDCHF), but forex options risk reversals are actually near neutral. It may subsequently be a battle between both markets to see who is ‘wrong’ or ‘right’, and it will be critical to watch whether the USDCHF can break key range lows.
[B]Australian Dollar/US Dollar Options Analysis
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We continue to call for a sustained Australian dollar pullback, as sentiment has remained extreme for quite some time now. Non-commercial futures traders remain the most net-long the AUDUSD since the pair traded above 0.90, and the currency’s persistent hold of range highs suggests that bulls may be running out of steam. Forex options market sentiment previously hit major extremes and has since moderated. Our earlier calls for AUDUSD pullbacks were clearly premature and highlight the difficulty in timing trades on sentiment extremes. Yet we remain bearish the AUDUSD.
[B]New Zealand Dollar/US Dollar Options Analysis
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The New Zealand dollar/US Dollar pair is quite similar to the AUDUSD, with significant sentiment extremes leaving the door open for further near-term declines. As of several weeks ago, Net Non-Commercial positioning on NZDUSD futures remained the most net-long since the pair set noteworthy tops in July, 2007. Already we see that traders have pulled back on extremely one-sided sentiment. Yet we see room for further corrections and accordingly remain bearish.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, [email protected]