Currencies | Dec 09 2010
Forex futures and options show that traders have shifted towards betting on and hedging against US Dollar strength. We will accordingly maintain our calls for US Dollar gains against the Euro, Australian Dollar, and other forex counterparts.
Recent choppiness has led to similarly sharp shifts in FX Options risk reversals, but our benchmark
breakout-style FX Options-based system hypothetically remains long the US Dollar against the Euro. It is admittedly difficult to hold to strong convictions amidst such intensely volatile markets, but we maintain that the US Dollar set an important bottom and is likely to continue higher through upcoming trade.
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Sharp swings in the Euro have coincided with similar shifts in forex options risk reversals, but our
benchmark breakout-style risk reversals system hypothetically remains short the EURUSD from November 26 at approximately 1.3242. Non-commercial forex futures traders remain net-short the euro against the US Dollar for the first time since September, underlining the abrupt shift in market sentiment from previous bullish extremes. The overall trend supports further Euro weakness, and fairly one-sided options sentiment suggests most traders continue to bet on and hedge against EURUSD declines.
British Pound/US Dollar Options Analysis
A continued US Dollar correction has left Non-Commercial Futures positioning short the GBPUSD for the first time since September, and similarly shifts in FX Options risk reversals suggest many have begun betting on and hedging against further GBP weakness. Yet our positioning bias is not quite as strong for the GBP as it is for the Euro, and our benchmark FX Options risk reversals systems are not particularly close to taking a position on the British Pound.
Thus the overall US Dollar recovery threatens to take the GBPUSD lower, but there are arguably better
trading opportunities in other currency pairs.
US Dollar/Japanese Yen Options Analysis
Three weeks ago we wrote, “the Japanese Yen has shown important signs of reversal against the resurgent US Dollar, and our breakout-style risk reversal trading system hypothetically established a long position as of November 10 at approximately 82.30. Heavily one-sided CFTC Commitment of Traders Non-Commercial positioning suggests that the pair could continue to rally amidst a broader pullback in leveraged bets.” This remains true, and we remain bullish the USDJPY until further notice.
US Dollar/Canadian Dollar Options Analysis
The USDCAD has recently held range lows, but the extent of the US Dollar recovery is far less than that seen through the Euro and other key counterparts. As it stands, Forex Futures positioning shows large speculators remain fairly net-short while FX options risk reversals are roughly neutral. The speed at which risk reversals have corrected higher suggests the swing in sentiment favors USDCAD gains. Yet our benchmark risk reversals trading systems are flat, and we have relatively little conviction in our calls for USDCAD strength.
US Dollar/Swiss Franc Options Analysis
A noteworthy unwind in USDCHF short positions has produced dramatic gains, and a similarly sharp shift in FX Options reversals strongly suggests the tide has turned in favor of further US Dollar gains. Unlike with the EURUSD, traders actually remain fairly net-long the Swiss Franc against the US currency. Our benchmark breakout-style trading system is very close to going long the USDCHF, and we accordingly remain bullish until further notice.
Australian Dollar/US Dollar Options Analysis
A substantial unwind in Australian Dollar long positions has led to a sharp correction in the previously highflying pair, while FX Options risk reversals have seen a similarly sharp pullback and point to an important turnaround for the AUDUSD. As it stands, COT data shows futures traders remain fairly heavily net-long and a further close of long positions would invite continued declines. FX Options are nonetheless near neutral and it is difficult to call for continued tumbles on mixed signals.
We maintain that the Australian Dollar set an important top above the $1.00 mark, but very short-term
outlook is unclear on admittedly unclear trader sentiment.
New Zealand Dollar/US Dollar Options Analysis
We wrote this three weeks ago we wrote this and it remains true: “Futures traders recently hit their most net-long the New Zealand Dollar since the pair topped in late 2009, but a sharp turn lower in FX options risk reversals suggests that many have begun to bet on and hedge against NZDUSD weakness. The combination warns that the pair could fall sharply if highly-leveraged speculators close their overextended longs within a short stretch of time. Though our benchmark FX Options risk reversals strategies are not particularly close to establishing short positions, we have already early signs of a potentially sharp reversal.”
Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
The views expressed are not FNArena's (see our disclaimer).
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Technical limitations
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