Forex futures and options markets show that traders have aggressively bet on and hedged against further US Dollar strength. We have claimed that this is indeed the US Dollar turnaround we had long been waiting for, and we accordingly remain bullish the US currency through the remainder of the year.
Forex futures and options markets show that traders have aggressively bet on and hedged against further US Dollar strength. We have claimed that this is indeed the US Dollar turnaround we had long been waiting for, and we accordingly remain bullish the US currency through the remainder of the year. Yet there is clear risk that the Greenback has hit bullish sentiment extremes against the Euro and other key currencies through recent trade, warning of a shorter-term pullback. Speculators may subsequently need to wait for better prices at which to go long the resurgent US currency.
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Euro/US Dollar Options Analysis
Forex futures and options traders are now extremely long US Dollars against the Euro, pointing to slowed gains for the resurgent Greenback. In fact, CFTC Commitment of Traders data show that net Non-Commercial short interest is at a record notional amount—underlining markets hard and fast shift towards dollar strength. The clear risk in this instance is that the US Dollar’s advance has occurred much too quickly and risks noteworthy corrections. Already we’ve seen risk reversals bounce noticeably from the lows, and we may be in for a short-term EURUSD correction.
British Pound/US Dollar Options Analysis
Net speculative positioning on the British Pound is considerably less extreme than that on the euro, leaving our US Dollar-bullish bias intact. In fact, COT Non-Commercial positioning on the GBP is a great distance from the depths seen when it first hit $1.60, and sharp downside momentum supports further weakness. Forex options markets have accordingly bet on and hedged against British Pound weakness. The key question is whether speculators will get a better price at which to sell on a short-term USD pullback.
US Dollar/Japanese Yen Options Analysis
Forex futures and options markets have bet on further Japanese Yen strength, giving us a bearish outlook on the USD/JPY pair. Indeed, CFTC COT data shows that Non-Commercial traders very recently flipped to net-long the JPY (short the USDJPY), while forex options traders have likewise hedged against Yen strength. The important question in this instance is whether upward momentum in the USD will offset a JPY recovery. We see greater downside potential in pairs such as the Australian Dollar/Japanese Yen due to recently sharp declines.
US Dollar/Canadian Dollar Options Analysis
A considerable shift in Canadian Dollar Futures and Options positioning suggests declines may slow. CFTC COT data recently showed Non-Commercials at their most Canadian Dollar bullish since the currency traded to parity with its US namesake—warning of a bullish sentiment extreme. As we had previously claimed, such one-sided positioning suggested that any pullback would be dramatic. We’ve clearly seen quite the USD/CAD reversal through recent trade, and we generally believe that the US Dollar may continue higher. Though shorter-term we see risks of USD/CAD corrections.
US Dollar/Swiss Franc Options Analysis
Non-Commercial futures positioning on the US Dollar/Swiss Franc pair recently flipped to net-long the US Dollar against the Swiss Franc—a considerable shift from previously one-sided USD short extremes. The speed at which markets flipped direction is clear signal that the overall tide has shifted, but as with the Euro, one begins to question whether the USD rally has occurred altogether too quickly. Given increasingly bullish Dollar positioning, we see risk of a short-term USDCHF correction before further advances.
Australian Dollar/US Dollar Options Analysis
Overall positioning suggests that the Australian Dollar can continue to decline against the US Dollar and other major counterparts through upcoming trade. Unlike in the Euro and other currencies, Non-Commercial Futures traders remain extremely net-long the Australian Dollar against the USD. An unwind of said speculative position could force further AUD/USD weakness, and traders should clearly be on the lookout for broader financial market de-leveraging through upcoming trade. If risk sentiment continues to falter, we can see the Aussie Dollar continue to drop against the USD.
New Zealand Dollar/US Dollar Options Analysis
The New Zealand/US Dollar pair is quite similar to the AUDUSD, with significant sentiment extremes leaving the door open for longer-term declines. Forex options sentiment on the New Zealand Dollar/US Dollar pair has seen a very sharp shift and shows that many are hedging against/betting on further NZD/USD weakness. Given such big moves in price, we see little reason to disagree and likewise expect further New Zealand Dollar weakness.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, [email protected]