Australian Dollar, Euro may Bottom Against US Dollar
By David Rodriguez, Quantitative Strategist
14 September 2011 16:00 GMT
FX Options risk reversals are now their most bearish
EURUSD in at least 7 years, and such extremely one-sided sentiment has
frequently coincided with noteworthy short-term bottoms. Past
performance is clearly no guarantee of future results, but recent
history warns that the EURUSD could see at least a modest bounce.
The same studies show FX Options risk reversals at
their most bearish AUDUSD since it bottomed near $0.60 in 2008, while
GBPUSD sentiment is at its most bearish since similar bottoms in 2010.
There seems to be heightened risk of a near-term US Dollar pullback.
Watch a presentation on how you can use FX Options risk reversals and this report in your swing trades.
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Risk Reversals
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EUR/USD
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GBP/USD
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USD/JPY
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USD/CAD
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USD/CHF
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AUD/USD
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NZD/USD
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1-Week
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52.38%
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6.35%
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77.78%
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62.30%
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96.72%
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4.84%
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4.76%
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1-Month
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17.46%
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5.66%
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74.14%
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79.66%
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100.00%
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1.59%
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1.56%
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3-Month
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12.31%
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5.26%
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58.33%
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85.00%
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100.00%
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1.61%
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1.61%
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12-Month
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12.28%
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6.56%
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31.67%
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98.21%
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100.00%
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4.84%
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3.28%
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DailyFX Volatility Index Percentiles
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Volatility Index
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1 Week
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2 Weeks
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1 Month
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3 Months
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1 Year
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Indices
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72.31%
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76.92%
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83.08%
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89.23%
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95.24%
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Euro/US Dollar Options Analysis
FX Options trading bias: Contrarian Bullish
EURUSD FX Options Risk Reversals recently hit their
most bearish in at least 7 years, showing clear warning that the pair
may be at an important short-term bearish extreme. Such tumbles in the
3-month risk reversal had previously called short-term bottoms. We were
admittedly early in calling for a near-term bounce last week, but the
early-week EUR bounce suggests it may have set a noteworthy short-term
bottom.
CFTC Commitment of Traders data shows Non-commercial
traders grew sharply net-short for the first time since January lows.
The combined sentiment extremes warn of near-term EUR rallies.
Australian Dollar/US Dollar Options Analysis
FX Options trading bias: Contrarian Bullish
Australian Dollar risk reversals are now at their
most bearish since the pair set a significant bottom near the $0.60 mark
in early 2008, warning of a potential bearish sentiment extreme. All
the while, CFTC Commitment of Traders data actually shows traders are
strongly net-long. The strong disconnect between options and futures
sentiment is difficult to explain.
We consistently warn that sentiment extremes are only
clear in hindsight. Yet it is difficult to ignore such extremely
one-sided options sentiment, and traders should remain cautious amidst
heightened risks of an AUDUSD bounce.
British Pound/US Dollar Options Analysis
FX Options trading bias: Bearish
We recently highlighted the fact that a sharp
downturn in GBPUSD options sentiment warned that the pair could break
below its multi-month range. And indeed, the British Pound has now
fallen sharply across the board. Options traders are now at their most
bearish GBPUSD since late 2010, while CFTC COT data shows Non-Commercial
positioning is modestly net-short.
The pair has now broken below what we called a
make-or-break level at 1.60. Overall sentiment favors selling rallies,
but it seems like the USD may be headed for a short-term decline across
the board. Watch for a GBPUSD bounce before further declines.
New Zealand Dollar/US Options Analysis
FX Options trading bias: Contrarian Bullish
The New Zealand dollar remains in an unsurprisingly
similar position as that of the Australian Dollar. NZDUSD options
sentiment is now near its most bearish since the pair set a significant
bottom near $0.65 in early 2010, while Commitment of Traders data shows
speculators remain heavily net-long the New Zealand Dollar against its
US namesake.
Overall the short-term looks relatively bullish for
the NZD. The same caveat is nonetheless the Dow Jones Industrial Average
and other key assets: the correlation between the NZDUSD and the Dow
leaves it especially susceptible to any sudden declines in stock
markets.
US Dollar/Japanese Yen Options Analysis
FX Options trading bias: Contrarian Bullish
The USDJPY has shown very mixed sentiment readings
as of late, refusing to break above range highs despite warnings of
potential reversal. We recently pointed out that CFTC Commitment of
Traders data recently showed Non-commercial traders near their most
JPY-bullish extreme (USDJPY-bearish) since the pair set an important
bottom in 2008.
It is always critical to note that sentiment
extremes are only clear in hindsight. In theory the bullish shift in
risk reversals and one-sided futures positioning should support
near-term USDJPY strength. Yet it seems the pair may remain stuck in its
recent range until further notice.
US Dollar/Swiss Franc Options Analysis
FX Options trading bias: Bullish
Recent Swiss National Bank currency market
intervention serves to confirm our preceding bullish bias. Obviously we
couldn’t have predicted that the central bank would intervene, but
sometimes it’s better to be lucky than good.
The USDCHF 3-month risk reversal previously hit its most bearish since
the pair first broke below SFr1.10 in 2009 and has since reversed. They
are now in the exact opposite camp at their most bullish since the pair
set a significant top through mid-2010. Short-term direction is
relatively unclear. Yet it remains fairly certain that the USDCHF set an
important bottom through recent trade.
US Dollar/Canadian Dollar Options Analysis
FX Options trading bias: Bullish
USDCAD FX Options sentiment has improved modestly as
the pair bounces off of range lows. CFTC Commitment of Traders data
shows that Non-commercial positioning is effectively neutral, and we see
no clear signs that the pair is likely to break beyond its recent
trading range.
It is difficult to establish a strong trading bias
amidst such pronounced choppiness. The recent trend towards USDCAD
strength gives us a modestly bullish bias. Yet the pair could just as
easily reverse at recent range highs.
Written by David RodrÃguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
To be added to this author’s distribution list, send an e-mail subject line “Distribution list” to drodriguez@dailyfx.com
DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.
Learn currency trading with a free practice account and charts from FXCM.
14 September 2011 16:00 GMT
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