Forex options and futures markets paint a decidedly mixed picture for the US Dollar, as traders are increasingly unsure of short-term direction. We had been calling for a major US Dollar turnaround for quite some time now, and the EUR/USD’s sharp initial reversal from $1.50 gave us reason to believe that the Greenback could continue higher.

Forex options and futures markets paint a decidedly mixed picture for the US Dollar, as traders are increasingly unsure of short-term direction. We had been calling for a major US Dollar turnaround for quite some time now, and the EUR/USD’s sharp initial reversal from $1.50 gave us reason to believe that the Greenback could continue higher. Yet the opposite has been true, and it has become increasingly difficult to establish a firm short-term trading bias. Suffice it to say, it will be critical to watch price action and sentiment indicators in the week ahead.

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Volatility expectations have dropped considerably from recent peaks, but this has not resulted in a slowdown in intraday US Dollar price volatility. Indeed, markets remain extraordinarily choppy on a day-to-day basis, but major currencies remain confined to choppy ranges. Given exceedingly low 1-week volatility expectations, we suspect that this may continue to be the case through near-term trading.

Euro / US Dollar Options Analysis

Futures positioning on the Euro/US dollar has unsurprisingly moderated as of late, as traders begin to close their extremely net-long positioning on EURUSD tumbles. FX options risk reversals likewise show that many are hedging against further Euro weakness, and we have effectively registered a short-term bearish extreme. The clear divergence between FX Options and Futures markets makes forecasts especially difficult, and choppy price action is expected.

British Pound / US Dollar Options Analysis

FX Options and Futures sentiment continues to suggest the British Pound may outperform the Euro on comparatively neutral positioning. Non-commercial traders actually remain fairly net-short GBPUSD—as they have been since it last traded above 2.0. FX Options risk reversals are decidedly neutral the currency pair, and our short-term outlook is somewhat mixed. Suffice it to say, however, a further unwind of FX Futures positioning would produce GBP strength.

US Dollar / Japanese Yen Options Analysis

Forex options markets hit clear bullish extremes on the USDJPY and gave us clear reason to call for further declines. Sentiment has since moderated but still shows that traders are aggressively hedging against JPY weakness (USDJPY strength). Given the overwhelming USDJPY downtrend, we suspect that such bullish extremes will continue to lead to short-term losses. It will be critical to watch price action as we inch closer to two-year lows.

US Dollar / Canadian Dollar Options Analysis

We have persistently called for Canadian Dollar weakness against the US Dollar (USDCAD strength), but a sharp shift in sentiment suggest the pace of gains may slow. Non-Commercial futures positioning had reached the most USDCAD-bearish (Canadian Dollar bullish) extremes since the pair traded near parity. We have seen futures positioning pull back somewhat, but the bigger story is FX options risk reversals. The sharp shift signals that USDCAD gains may slow.

US Dollar / Swiss Franc Options Analysis

Non-Commercial futures positioning on the US Dollar/Swiss Franc pair remains the most bearish in nearly 5 years—pointing to clear sentiment extremes. Yet FX Options actually show that risk reversals are at bullish extremes and give a decidedly mixed view on the Swiss Franc. All else remaining equal, we expect that an unwind of USDCHF shorts (Swiss Franc longs) will produce rallies. Yet the sharp shift in Risk Reversals suggests that the pace of gains will slow.

Australian Dollar / US Dollar Options Analysis

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 near the most net-long the AUDUSD since the pair traded above 0.90. As with other US Dollar pairs, however, FX options show a substantive shift in market sentiment. The impressive drop in risk reversals suggest that the pace of AUDUSD losses may slow, but we remain bearish on a medium-term basis.

New Zealand Dollar / US Dollar Options Analysis

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. Yet the AUDUSD has clearly outperformed, and traders have begun pulling back from their previously one-sided NZDUSD positioning. Short-term forecasts are decidedly less clear.

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com