The US dollar has finally shown signs of life, and previously extreme anti-USD positioning suggests that the dollar may rally further on the abrupt shift in market sentiment. We have (prematurely) argued for a major USD bottom through the past several weeks of price action. Both forex options and futures markets showed that traders remained extremely short the USD through recent trade, and a potential unwind leaves scope for continued US dollar appreciation.
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As of August 4, speculative futures traders remained the most net-short US Dollars against the British Pound and Euro since each traded above 1.90 and 1.60. Sharp reversals in the EURUSD and GBPUSD led the currency pairs dramatically lower in the months that followed—coinciding with similar routs in the S&P 500 and other key risk sentiment barometers. There is obviously no real way to predict that the same may occur in the weeks ahead, but the fact that traders remained so heavily net-short US Dollars leaves clear risk of a swift unwind in positions.
Euro/US Dollar Options Analysis
Net Non-Commercial CFTC Commitment of Traders data shows that traders remain extremely net-long the Euro/US Dollar—leaving scope for a noteworthy correction. As of Tuesday, August 4th, speculators held a sizeable 27k contracts net-long the currency pair. Given the inherent delay in once-a-week COT data, we cannot know exactly where these same traders stand now. Forex options data registered similar extremes through last week’s trade and has since pulled back sharply. If this is the beginning of a more sustained term, we should see risk reversals turn considerably lower.
British Pound/US Dollar Options Analysis
Our forex futures and options forecast for the British Pound/US Dollar is quite similar to that of the Euro with one key difference. COT data showed that Non-Commercial traders remained heavily net-long the EURUSD through recent trade, but they are actually still marginally net-short the GBPUSD as of August 4. The graph above highlights that this is actually the most bullish they have been since the GBP traded above 1.90. Yet the fact that they remain net-short leaves less scope for a positioning-led GBPUSD correction.
US Dollar/Japanese Yen Options Analysis
Forex options data shows that the US Dollar/Japanese Yen currency pair remains in extremely overbought territory and is at clear risk for a noteworthy pullback. We took an aggressively bearish stance on the USDJPY as of Thursday, August 6. Of course, the post-US Nonfarm Payrolls US Dollar rally/Japanese Yen slide clearly did not work in our favor. We nonetheless believe that a USDJPY turn is likely on bullish sentiment extremes. The recent pullback in net Non-Commercial COT short positions leaves scope for a fairly large USDJPY pullback.
