Forex Options Weekly Forecast

Forex options markets show that professional traders remain remarkably indecisive, and the lack of clear-cut sentiment on the US Dollar makes it difficult to set short-term expectations with any sense of certainty. More medium-term to longer-term options broadly favor US Dollar weakness. Yet it is important to point out that the currency recently set a bearish sentiment extreme across a broad swath of indicators, and we will be on the lookout for a turnaround in short-term USD expectations.

Forex options markets show that professional traders remain remarkably indecisive, and the lack of clear-cut sentiment on the US Dollar makes it difficult to set short-term expectations with any sense of certainty. More medium-term to longer-term options broadly favor US Dollar weakness. Yet it is important to point out that the currency recently set a bearish sentiment extreme across a broad swath of indicators, and we will be on the lookout for a turnaround in short-term USD expectations.

Read a how-to guide on understanding our Forex Options Weekly Forecast report.

Risk reversals have recently moderated on lackluster FX price action, and falling volatility expectations give little scope for major moves through near-term trade. In fact our volatility indices are near their lowest levels since the height of financial market tensions in late 2008. A further moderation would all but rule out a major USD breakout, and it will be important to watch for an uptick in volatility expectations before calling for bigger currency moves.

Euro/US Dollar Options Analysis

The Euro/US Dollar recently hit a powerful bullish extreme on its run up to year-to-date highs, and we have consistently favored EURUSD declines through the past several weeks of trade. Day-to-day choppiness has of course made it extraordinarily difficult to maintain confidence in said forecast, but the fact that COT net Non-Commercial longs is likewise hitting extremes suggests a turn is near. It remains especially difficult to time big moves through recently choppy trade, but we continue to favor medium-term EURUSD weakness following its bullish extremes.

British Pound/US Dollar Options Analysis

Forex Options-based outlook for the British Pound/US Dollar pair remains similarly bearish, and a major sentiment extreme threatens to derail GBP strength. It’s interesting to note that Net Non-Commercial have pulled back since last week’s trade, implying that traders are growing less bullish. Yet we would expect a bigger reversal on such strongly one-sided sentiment extremes. The timing remains the tricky part of course. Markets can remain extreme for extended periods of time, and it is difficult to estimate exactly when the GBPUSD may turn lower.

US Dollar/Japanese Yen Options Analysis

FX Options markets risk reversals recently hit bullish extremes on the USDJPY, but it is interesting to note that said extremes did not coincide with similar developments in Non-Commercial Net Positions. In fact, COT data shows that speculators are just barely bullish the USDJPY with Net Non-Commercial Positions at the middle of their multi-month range. The USDJPY remains stuck in a fairly wide trading channel, and relatively mixed trader sentiment gives few clues on short-to-medium-term direction.

US Dollar/Canadian Dollar Options Analysis

The US Dollar/Canadian Dollar pair recently reversed sharply on clear sentiment extremes, and the resulting rally is a classic example of what can happen when currencies reverse on one-sided positioning. Indeed, Commitment of Traders data showed that Non-Commercial traders—typically speculators—were the most net-short the USDCAD since it traded near parity. The COT extremes coincided with similarly overextended FX Options risk reversals, and the result was clear. Near-term implications are far less straightforward, and near-neutral FX Options give little indication on what to expect through near-term trade.

US Dollar/Swiss Franc Options Analysis

Recent COT data shows that Non-Commercial traders are the most net-short the US Dollar/Swiss Franc currency pair since July, 2008—suggesting we may be near a major turn in sentiment. It is interesting to note that this has not coincided with similar extremes in FX Options risk reversals, however, and the divergence clouds our forecasts for the USDCHF. The two typically track each other very closely, and we would ideally see bearish extremes in FX Options risk reversals before calling for a major USDCHF reversal.

Australian Dollar/US Dollar Options Analysis

Australian dollar positioning and sentiment remains quite bullish, and one-sided COT data suggests that the AUDUSD pair could turn lower through upcoming trade. Indeed, Non-Commercial traders remain the most net-long AUDUSD since late 2008, but it is interesting to note that FX Options risk reversals have not registered similar extremes. We would ideally wait for major bullish extremes in FX Options before calling for a noteworthy AUDUSD reversal.

New Zealand Dollar/US Dollar Options Analysis

The New Zealand dollar/US Dollar pair is quite similar to the AUDUSD, with Non-Commercial COT positioning at major bullish extremes. In fact, net Non-Commercial positions are at their most bullish since the NZD peaked in July, 2007. One-sided sentiment clearly leaves risks for a material turnaround, and it will be critical to watch for early signs of potential reversal in the high-flying pair.

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, [email protected]