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US Dollar Near Major Turning Point versus Euro, Aussie, Yen

By , Quantitative Strategist
21 March 2012 22:15 GMT

The US Dollar (ticker: USDOLLAR) could soon see significant strength against the Euro and Australian Dollar as markets near a sentiment extreme. Yet the USDJPY pair could shed gains as markets pull back on recent gains.

FX Options traders are at their most relatively bullish Euro and Australian Dollar against the US Dollar since the pairs set significant price extremes in late 2011. And though we must emphasize that tops are only clear in hindsight, such one-sided sentiment warns of potential turnarounds.

FX Options volatility expectations are at their lowest levels since the onset of the financial crisis, and an exceedingly low S&P 500 Volatility Index should usually support Australian Dollar strength. Yet such levels of complacency warn that the next major move may be right around the corner. Indeed, we cautiously await clearer signs of a major turnaround in the AUDUSD, S&P 500, and broader financial markets.

Watch a presentation on how you can use FX Options risk reversals and this report in your swing trades.

Risk Reversals

EUR/USD

GBP/USD

USD/JPY

USD/CAD

USD/CHF

AUD/USD

NZD/USD

1-Week

67%

65%

4%

23%

33%

61%

42%

1-Month

98%

87%

16%

3%

30%

93%

70%

3-Month

100%

81%

60%

29%

31%

96%

85%

12-Month

88%

100%

85%

20%

43%

100%

82%

DailyFX Volatility Index Percentiles

Volatility Index

1 Week

2 Weeks

1 Month

3 Months

1 Year

Indices

11%

3%

6%

5%

20%

forex_us_dollar_japanese_yen_reversal_body_Picture_1.png, US Dollar Near Major Turning Point versus Euro, Aussie, Yen

Euro/US Dollar Options Analysis

forex_us_dollar_japanese_yen_reversal_body_Picture_2.png, US Dollar Near Major Turning Point versus Euro, Aussie, Yen

Net Non-Commercial COT Futures Positioning (rhs)

1-Week Risk Reversal Percentile (lhs)

3-Month Risk Reversal Percentiles (lhs)

FX Options trading bias: Reversal Risk High

FX Options traders have suddenly grown to their most bullish the Euro against the US Dollar since the EURUSD traded toward $1.48 in April of last year. CFTC Commitment of Traders data likewise shows that Non-commercial traders—large speculators—are their least short Euro since December.

On balance it seems that the Euro may have further room to run to the topside, and indeed that lines up with a very recent short-term uptrend. Yet we see key risks that the Dow Jones FXCM Dollar Index could break through key resistance and the Euro could drop below important support. The USDOLLAR trades near significant 8-month range highs, and the next move could prove pivotal.

As it stands, Options and futures suggest there is short-term EURUSD upside. Yet a Dollar breakout would quickly negate a EUR-bullish bias and call for a return to the longer-term downtrend.

US Dollar/Japanese Yen Options Analysis

forex_us_dollar_japanese_yen_reversal_body_Picture_3.png, US Dollar Near Major Turning Point versus Euro, Aussie, Yen

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Reversal Risk High

FX options traders have significantly scaled back speculative positions on and hedges against further Japanese Yen weakness (USDJPY strength), and we see significant evidence that the Japanese Yen may trade higher against the Euro and British Pound.

We had previously argued that the USDJPY could rally significantly as speculative futures traders remained heavily net-short, but that is no longer the case. In fact those same traders are now their most net-long USDJPY (short JPY) since the pair set a substantial top at ¥85. Is this a guarantee that the pair could turn? Absolutely not.

Yet a major reason we called for USDJPY rallies is that no one expected the pair to bottom. Now speculators have jumped boldly into the position, and the fact that markets are well-aware of the Japanese Yen reversal suggests a short-term pullback is likely.

Australian Dollar/US Dollar Options Analysis

forex_us_dollar_japanese_yen_reversal_body_Picture_4.png, US Dollar Near Major Turning Point versus Euro, Aussie, Yen

Net Non-Commercial COT Futures Positioning

1-Week Risk Reversal Percentile

3-Month Risk Reversal Percentiles

FX Options trading bias: Reversal Risk High

Australian Dollar options traders are at their most bullish AUDUSD since the pair set a record high in July, 2011, and extremely one-sided sentiment warns that the pair may be a significant turning point. We have recently argued that the Australian Dollar could hit fresh record-highs as the US S&P 500 Volatility Index (VIX) hit multi-year lows. And we can’t rule out further AUD strength, but such low levels of the so-called “Fear Index” warn that financial markets are very complacent.

In other words: such relative bullishness warns of potential sentiment extremes and an Australian Dollar top. We have and will continue to warn that tops are only clear in hindsight. As such, we will need to wait for more concrete signs of reversal before turning bearish. Already we see evidence that the AUDUSD may be trading lower and our overall short-term bias has turned bearish.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

http://www.dailyfx.com/forex/technical/elliott_wave/aud-usd/2012/03/21/eliottWaves_aud-usd.html

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21 March 2012 22:15 GMT