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Forex Options and Futures Point to British Pound, US Dollar Recovery.

Forex Options and Futures markets show US Dollar sentiment at near-record bearish extremes against almost all major counterparts, and one-sided positioning suggests that the USD is near a major turning point. The key difficulty remains the timing of said turnaround, as US Dollar-bearish sentiment has remained extreme for quite some time now. The key exception is USD positioning versus the British Pound, and recent corrections in price suggest that the GBPUSD has set a major medium-term bottom.



Volatility expectations have jumped considerably on recent US Dollar losses. We typically see important market turns when volatility is at or near its peak. Of course, guessing the peak for Forex Options Market implied volatility levels is a feat onto itself. As it stands, we recognize that the US Dollar may continue lower through short-term trading. Yet every further USD short only increases the likelihood of an important market corrections and—by extension—a Dollar recovery.




Futures positioning shows that Non-Commercial traders (typically large speculators) had become extremely net-long the Euro against the US Dollar. In fact, said speculative positioning is was previously the most long it had been since the Euro traded near 1.6000 in early 2008. We consistently warn that extreme positioning and sentiment can and does remain extreme for extended periods of time. Yet it is interesting to point out that options sentiment actually shows many traders are beginning to hedge against EURUSD weakness. It’s possible that the EURUSD has set a noteworthy top.



Futures and Options sentiment paint a distinctively different picture for the British Pound against the US Dollar, as traders have actually grown extremely long USD versus its UK counterpart. Indeed, Net Non-Commercial positioning just recently hit its most bearish in history—emphasizing GBP bearish extremes. CFTC COT data is always delayed by at least 4 days, but the spike in Forex Options risk reversals suggests we are in the midst of a reversal. Given such overwhelmingly bearish positioning, we can foresee further GBPUSD rallies as traders cover their short positions.



Impressive Japanese Yen rallies (USDJPY declines) have led to similarly impressive positioning in futures markets, with Non-Commercial traders the most heavily net-short USDJPY since it last traded below 90. Yet more recent shifts show traders have pulled back in their JPY-long bias, and forex options risk reversals actually shows sentiment is near its most JPY-bearish in the past 90 trading days. The net sentiment reading is admittedly fairly unclear, and we may need to wait for further clarification before making a concrete Yen forecast.



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. Yet forex options markets have grown near-neutral the USDCAD, and the sudden shift in FX Options hints at the beginning of a short-term reversal. It is always extremely challenging to pick tops and bottoms on sentiment extremes, but we would argue that USDCAD risks remain to the topside through the coming months of trade.



Non-Commercial futures positioning on the US Dollar/Swiss Franc pair remains the most bearish in nearly 5 years—pointing to clear sentiment extremes. Swiss Franc long positions (USDCHF shorts) outnumber short positions by a over 20,000, and it is little surprise to note that the USDCHF trades very near parity. Yet the last time net-long CHF positions grew to this level was in December, 2004. At that point the USDCHF set an important low and rallied over 1000 pips in 10 months. Past performance is not a guarantee of future results, but the likelihood of a USDCHF bottom is high.



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 believe that extreme sentiment increases risk of pullbacks.



The New Zealand dollar/US Dollar pair is quite similar to the AUDUSD, with significant sentiment extremes leaving the door open for near-term declines. As of last week, Net Non-Commercial positioning on NZDUSD futures remained the most net-long since the pair set noteworthy tops in July, 2007.

Written by David Rodríguez, Quantitative Strategist


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