US Dollar Sentiment at Extremes but Few Signs of Pullback

Forex options and futures markets show that anti-US Dollar positioning remains at extremes, but the US Dollar has thus far shown few signs of potential reversal on recently dramatic declines. The question now becomes: can we expect the US Dollar to continue lower?

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FX options show that volatility expectations have risen on the dollar breakdown, but we would argue that volatility levels have not risen to values that would support further breakouts. Indeed, the term structure of FX Options’ Implied Volatilities shows that traders are braced for sharp short-term moves but do not necessarily expect sustained medium-term trends. It will obviously be critical to watch developments through near-term trading—especially ahead of what promises to be an eventful week of economic data releases.

Euro/US Dollar Options Analysis

The Euro/US Dollar has defied our calls for reversal and broken to fresh year-to-date peaks, while positioning measures have actually eased from major sentiment extremes. The CFTC’s Commitment of Traders report shows that net Non-Commercial long positions grew to their most bullish since the EURUSD traded at 1.60 through recent trade. Yet net-longs actually decreased through the week ending on July 28, while FX Options risk reversals have similarly eased. We cannot reasonably call for a sustained pullback absent clear extremes, and we have become short-term bullish the EUR.

British Pound/US Dollar Options Analysis

The British Pound continues to rally despite increasingly one-sided speculative positioning, and the sheer strength of recent advances gives us little reason to expect a major reversal through near-term trade. We had previously called for a major correction in the GBPUSD, but we warned and will continue to warn that sentiment can remain extreme for extended periods of time. In fact, CFTC Commitment of Traders data shows that Net Non-Commercial positions actually grew less bullish through last week’s trade, and we believe the GBPUSD will rally further before correcting.

US Dollar/Japanese Yen Options Analysis

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 remain near 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. Short-term outlook is subsequently mixed.

US Dollar/Canadian Dollar Options Analysis

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.

US Dollar/Swiss Franc Options Analysis

Forex Futures and Options data show that markets have become extremely bullish the Swiss Franc (bearish the USDCHF) as the currency has broken to fresh YTD peaks versus the US Dollar. Indeed, CFTC COT data shows that Non-Commercial traders are the most bearish USDCHF since the pair traded near parity. All the while, forex options data shows risk reversals are at their most negative levels since the USDCHF bottomed in June. As with other US Dollar pairs, we believe that the USDCHF will produce a strong reversal. Yet the timing remains extremely difficult as the pair hits fresh lows.

Australian Dollar/US Dollar Options Analysis

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, but the timing of said retracement remains extremely challenging. 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.

New Zealand Dollar/US Dollar Options Analysis

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, <[email protected]>