Forex Options and Futures Support Calls for US Dollar Bottom, Euro Top

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. Today’s US Dollar pullback may in fact be the start of a bigger reversal. The key difficulty remains the timing of said turnaround, as US Dollar-bearish sentiment has remained extreme for quite some time now. According to our Senior Strategist, the Euro/US Dollar’s break below 1.4980 is the first sign of a top.

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.

Euro/US Dollar Forex Options and Futures Forecast

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 EURUSD has set a noteworthy top.

British Pound/US Dollar Forex Options and Futures Forecast

Futures and Options sentiment paint a distinctively different picture for the British Pound against the US Dollar, as traders had actually grown extremely short the GBP against the USD. The GBPUSD very recently rallied on aggressive speculative short covering, and indeed Net Non-Commercial short positioning went from -65,346 contracts to -43,318 through the week ending October, 20. This fairly substantial shift is perhaps only the earliest stage of a larger unwind.

US Dollar/Japanese Yen Forex Options and Futures Forecast

Forex options markets show that traders are the most bullish the USDJPY (Bearish the Japanese Yen) in the past 90 trading days, while the longer-term trend in price shows we are in a fairly clear downtrend. The FX options market sentiment extremes suggest that we may have hit a USDJPY top and it is likely to continue its longer-term correction. The major caveat is that Futures positioning actually shows speculators still fairly short the USDJPY (long Yen), and a pullback in speculative interest could fuel a USDJPY rally. The mixed signals give us a fairly neutral bias on the USDJPY.

US Dollar/Canadian Dollar Forex Options and Futures 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. We have continued to call for a USDCAD reversal, and the very recent rally suggests we may have set a substantive USDCAD bottom. It stands to reason that a further unwind in positioning would result in further Canadian dollar losses (USDCAD rallies).

US Dollar/Swiss Franc Forex Options and Futures Forecast

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. Watch for further rallies.

Australian Dollar/US Dollar Forex Options and Futures Forecast

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 has hit similarly overextended bullish extremes.

New Zealand Dollar/US Dollar Forex Options and Futures Forecast

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 several weeks ago, Net Non-Commercial positioning on NZDUSD futures remained the most net-long since the pair set noteworthy tops in July, 2007.

Written by David Rodriguez

Tuesday, October 27, 2009 | 0 comments | Read More

FX Correlations

The following is our monthly correlations update for October.  As we have stated time and again, correlations between different currency pairs will inevitably shift over time. Therefore, it is of utmost importance to keep abreast of these fluctuating relationships to fully understand your trades and portfolio.  Below are the one-, three-, six- and twelve-month correlations for the seven major currency pairs.  Additionally, we have included the six-month trailing correlation for the majors against the EURUSD for a different view of correlation.

In order to be an effective trader, it is important to understand how different currency pairs move in relation to each other (and in conjunction to other markets).  There are a few reasons why this is significant, but most importantly, it allows traders to understand their net exposure. Such exposure goes well beyond merely buying or selling too much of a single currency against its various counterparts. There are fundamental links underlying the market which wax and wane depending on what the prevailing concern in the market happens to be. Comparing and contrasting a portfolio made of EURUSD and AUDUSD against one comprised of EURUSD and AUDUSD highlights this development. Evaluating the correlations amongst the majors today against what they were just a few months ago or a year ago, we can see that there is far less consistency. What is the difference between those periods and today? Risk appetite. Just a few months ago, demand for return and lack of financial turmoil was offering a boost to all securities that were particularly high or low on the risk scale. A year ago, things were exactly the opposite with all-consuming fear driving all markets lower. Today, the outlook for capital appreciation has leveled off and the binding influence of risk trends has begun to breakdown. Nonetheless, we can see the market is ready to revive its ties. Holding its reserve currency status the US dollar has  seen its anti-risk role shift against currencies that are at different levels of the scale of return. In turn, the correlation between EURUSD and AUDUSD price action over the past month has cooled (0.74). At the same time, the Swiss franc’s relative role of safe haven hasn’t prevented significantly diminished the tight relationship of EURUSD and USDCHF price action (-0.94) – suggesting economic links are still a primary force in Forex speculation.

For evidence of the ebb and flow in risk’s influence over price action, we can see its correlation rise and fall over time. Establishing a base line of a six month trailing correlation, we saw last month the EURUSD and USDJPY correlation was tightening (-0.22) with a shift in risk trends towards growth concerns and a changing of the guard so to speak amongst the yen and dollar for the title of top safe haven. This was during the period when risk appetite was generally rising. Look back to the six months through March in comparison; and the dramatic change in risk trends essentially anchored the correlation near zero (0.08). Overall, having this knowledge will allow traders to effectively diversify and manage their portfolios over time.

Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind the correlation between various currency pairs and their shifting trends. 

FX Correlations (data as of 10/01/09)

 

Written by Jamie Saettele

Sunday, October 25, 2009 | 0 comments | Read More

Swiss Franc Long Positions Highest Since December 2004 (COT)

COT data is yet another piece of the puzzle that warns of a USD low.  EUR, AUD, NZD, CAD, and CHF long positions are at their highest levels in year(s).  Previous instances of one sided positioning led to reversals.

Latest CFTC Release Dated October  13, 2009:

The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13).  A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming.  The readings are for the actual currency, not the currency pair.  For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).

Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes.  For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.

US Dollar

Speculators continue to pile on shorts.  The red line (speculative positions) is near the record levels that were reached in 2008.  Positioning is clearly extreme and a turn will come with a sentiment extreme.  The question is whether or not that happens sooner than later.

Euro

The difference between speculative and commercial positioning is the highest that it has been since January 2008.  A roughly 600 pips drop accompanies that extreme.  These are the types of conditions that precede a reversal.

British Pound

 

WOW.  Speculators were certainly betting on a British Pound collapse.  Short positions on Sterling reached an all-time high.  Of course, this data is current as of Tuesday, which was before the GBPUSD rally.  The numbers were the same last week too, so COT made a good call on the GBPUSD low.  Next week’s numbers will reflect the rally (decreased number of shorts…probably significantly). 

Australian Dollar

 

AUD speculative long positions are the highest since mid July 2008 – which was when the AUDUSD topped at .9850.  Futures traders are heavily long and have been since mid-August.  Reversal alarms are blasting – the only thing missing at this point is the reversal.

New Zealand Dollar

NZD longs are not as extreme in the historical context as the AUD longs, but positioning is the most onesided October 2007.  A reversal is expected soon.

Japanese Yen

 

Yen longs were extreme the past several weeks, which warned of a turn.  That turn has occurred so favor the downside in Yen (upside in USDJPY).

Canadian Dollar

CAD longs are the highest since June 2008.  The CAD made an important top against the USD at that point.  The weekly candle pattern made a hammer, which is a bullish reversal pattern.  Favor selling the CAD (buying USDCAD).

Swiss Franc

 

Swiss Franc longs are at their highest level since December 2004.  That was a time that marked a significant high in the CHF (USDCHF low).  Expect the same here.

Jamie Saettele publishes Daily Technicals (majors) every weekday morning, COT analysis (Friday, market close), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary at DailyFX Forex Stream.

Written by Jamie Saettele

Sunday, October 25, 2009 | 0 comments | Read More

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

Thursday, October 22, 2009 | 0 comments | Read More

GBPCAD Long Term Bullish Opportunity

GBPCAD Long Term Bullish Opportunity - Opportunities through the more exotic currency crosses are often overlooked. This week, we are highlighting a long term opportunity in the GBPCAD. Technical evidence suggests that a significant low formed in November 2007 and upside potential significantly outweighs the risk.

From a technical standpoint, the GBPCAD may have formed a significant low. Notice on this monthly chart that the low in November 2007 (1.9011) spiked below a support line that is drawn off of the September 2000 and March 2006 lows. Price has held above that line since. The indicator plotted below price is a 60 period momentum oscillator. 60 months is 5 years so what this indicator tells us is how far in either direction price has deviated from its 5 year average. In November 2007, the indicator made a spike low near 5,000 (5,000 pips below its 5 year average). The 1992 low also formed after price had fallen 5,000 pips below its 5 year average. Momentum has turned up from a level that previously signaled a significant low.

This is the same line that was plotted on the monthly chart. As mentioned, price has held above the line since November. Since then, the GBPCAD has pushed through the 200 day SMA; another sign that a major low is in place.

Indicator studies such as momentum and averages help identify potential opportunities, but these tools are insufficient for pinpointing entry points and defining risk. The Wave Principle makes possible the determination of accurate entry points while taking on appropriate risk. From the May 2008 low, the GBPCAD rallied in 5 waves without making a new high (ended below the March 2008 high). Therefore, we know that the trend is up. A correction was expected and has occurred. It is possible that the corrective is over at 1.9919 (notice the red line at the center of the triangle…this indicates support from congestion). A deeper correction is possible but a long term bullish bias is warranted against 1.9288. Bullish targets will be approximated as the trend matures, but expect a test of the 2006 high near 2.35 in the year(s) ahead.

Written by Jamie Saettele, Technical Currency Strategist

Tuesday, October 13, 2009 | 6 comments | Read More