Forex Futures and Options continue to give fairly bullish forecast for the US Dollar, as a general unwind of extreme USD-short positioning would almost certainly bring further appreciation. A jump in volatility expectations likewise supports major market moves and leaves clear risk for short-term USD strength.
Of course we would be remiss if we did not point out substantial economic event risk in the hours and days ahead, and very short-term USD moves will almost certainly depend on the outcome of several reports and announcements. Regardless, we believe that positioning favors continued Dollar rallies—especially against the previously high-flying Australian Dollar, New Zealand Dollar, and Canadian Dollar.
Continued US Dollar rallies have unsurprisingly been met with similarly aggressive moves in Forex Options market risk reversals, and we continue to see markets hedge against and bet on US Dollar strength. Given the speed of Greenback appreciation, we are fairly confident that this is the beginning of a larger recovery. Yet it is likewise clear that all prices almost never move in a straight line. As 1-week Euro/US Dollar risk reversals hit their most bearish in approximately the past 90 days, there is distinct risk of a short-term USD correction (EURUSD bounce) in the context of a larger rally.
Forex Futures and Options paint a much more sanguine picture for the British Pound against the US Dollar, as the previously-downtrodden GBP has generally outperformed major counterparts despite dramatic USD strength. Non-Commercial futures positioning is actually still net-short the GBP/USD and has been since the pair traded near 2.00. As traders unwind their leveraged bets through times of financial market uncertainty, the GBP may in fact strengthen on a pullback in net-short open interest.
Japanese Yen Forex Options sentiment data suggests that the US Dollar/Japanese Yen currency pair set a fairly major top and is likely to trend lower through upcoming trade. Non-Commercial Futures positioning showed that speculators were essentially the most bullish-USDJPY (bearish Japanese Yen) since the pair set a significant top at 110—warning that sentiment was unsustainable and a reversal was likely. We have indeed seen the pair pull back substantially, and the dramatic shift in risk reversals suggests this will continue through upcoming trade.
The dramatic US Dollar recovery against the Canadian Dollar suggests that the USD/CAD currency pair set an important low through recent trade. Forex futures data shows that Non-Commercial traders (typically speculative in nature) hit their most bullish Canadian dollars (bearish USDCAD) since the pair traded at parity. Given that risk reversals have hit clear bullish extremes, however, buying the USD/CAD presents poor risk-reward on clear risk of a shorter-term pullback. Yet the speed of the pair’s recovery suggests we can expect further USDCAD rallies through coming months.
Non-Commercial futures positioning on the US Dollar/Swiss Franc pair recently hit its most bearish in nearly 5 years—pointing to clear sentiment extremes. A sharp US Dollar reversal produced a flip to net-long and underlines the aggressiveness of the recent USD recovery. We have little reason to disagree with such an assessment, and our generally bullish US Dollar forecasts implies that we expect the USD/CHF pair to continue higher through short-term trading.
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