U.S. Dollar to Decline on Extreme Forex Positioning

Forex futures and options markets have aggressively bet on a U.S. dollar recovery against the Euro and other key counterparts, leaving scope for a short-term correction in the context of a broader Greenback recovery. Indeed, CFTC Commitment of Traders data shows Non-Commercials hold a record notional net-short position in the Euro against the U.S. dollar, leaving relatively little room for further selling.

Forex futures and options markets have aggressively bet on a U.S. dollar recovery against the Euro and other key counterparts, leaving scope for a short-term correction in the context of a broader Greenback recovery. Indeed, CFTC Commitment of Traders data shows Non-Commercials hold a record notional net-short position in the Euro against the U.S. dollar, leaving relatively little room for further selling. The speed of the Dollar recovery tells us that this is the turn we have long been waiting for, but many signs point to short-term consolidation or pullbacks before the USD can continue higher.
Euro / U.S. Dollar Options Analysis

Forex futures and options traders remain extremely long the U.S. dollar against the Euro, and we see scope for further short-term USD losses within the scope of a broader rally. Indeed, last week we wrote that the EURUSD was likely to bounce from its recent lows or at the very least slow its descent. A pickup in Forex options risk reversals suggests that EUR bears have taken their foot off of the accelerator, and we are likely to see further short-term consolidation. A drop in overall volatility expectations supports this thesis and we may see the EURUSD drift higher through the short term.

British Pound / U.S. Dollar Options Analysis

Net speculative positioning on the British Pound is quite similar to that of the Euro, with Non-Commercial traders very much net-short the GBP/USD. Similar one-sided extremes in forex options risk reversals suggest that the GBP/USD may consolidate through the near-term in the context of a broader decline. A more recent bounce in FX Options sentiment tells us that bears have relented somewhat, and the overall drop in volatility expectations points to range-bound price action for the British Pound against the U.S. dollar.

U.S. Dollar / Japanese Yen Options Analysis

Forex futures traders have aggressively bet on further Japanese Yen strength, giving us a fairly bearish overall outlook on the U.S. Dollar/Japanese Yen currency pair. Yet more recent price action has pushed forex options risk reversals near their highest in quite some time, and markets are seemingly unwilling to push the USDJPY lower just yet. The mixed signals between Futures and Options positioning give us an accordingly unclear trading bias, and we suspect the USDJPY may consolidate or trade slightly higher through short-term trade.

U.S. Dollar / Canadian Dollar Options Analysis

A shift in Canadian Dollar Futures and Options positioning suggests declines may slow. Last week we highlighted the sharp shift towards CAD shorts (USDCAD longs) that pointed to a bullish sentiment extreme. We have subsequently seen price pull back fairly noticeably as markets consolidate and absorb recent USDCAD rallies. The commensurate turnaround in risk reversals shows that some are betting on further Canadian Dollar strength (USDCAD weakness), while the overall drop in volatility expectations suggests the pair may consolidate before any further sharp moves.

U.S. Dollar / Swiss Franc Options Analysis

Non-Commercial futures positioning on the U.S. Dollar/Swiss Franc pair recently flipped to net-long the U.S. 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 / U.S. Dollar Options Analysis

Forex Futures and Options positioning on the Australian Dollar paint a mixed short-term picture for the recently high-flying currency. Non-Commercial traders-typically speculative in nature-remain heavily net-long the Australian Dollar against its U.S. namesake. All the while, FX Options traders had recently hit bearish extremes and have since pulled back. The considerable shift in risk reversals suggests that the recent rally may continue through the near term, but clearly one-sided futures positioning paints a bearish picture overall. Look for consolidation through near-term trade.

New Zealand Dollar / U.S. Dollar Options Analysis

A noteworthy shift in New Zealand dollar futures positioning suggests that the pair's impressive declines may slow, but we remain long-term bearish the previously high-flying carry trade currency. Futures traders have heavily trimmed their one-sided New Zealand Dollar longs through recent declines. All the while, forex options risk reversals dropped to clear bearish extremes and have since bounced. All in all, we see scope for longer-term NZD pullbacks within the context of a broader financial re-pricing of risk. Yet we could see short-term NZD bounces and consolidation given market indecision.

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
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