US Dollar/Japanese Yen forex options show sentiment at major bullish extremes, and we forecast a noteworthy Japanese Yen rally in the weeks ahead. We had previously called for sharp US Dollar recovery using the same logic. Said forecasts initially showed promise on the USD bounce, but more recent price action limits scope for continued US Dollar strength. We subsequently turn our attention to potential for Japanese Yen strength.

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DailyFX Volatility Index Percentiles

Forex options traders remain the most bullish USD/JPY (bearish the Japanese Yen) as they have been in the past 12 months of trading. We have previously found that these kinds of sentiment extremes coincide with noteworthy price tops or bottoms. In this case we would argue for a noteworthy JPY reversal. A sudden drop in overall market volatility expectations (as seen through our DailyFX Volatility Indices) works against our Japanese Yen forecast. Yet it will be critical to monitor currency market sentiment through near-term trading.

DailyFX Volatility Indices

Euro/US Dollar Options Analysis

Forex options and futures markets show that anti-US Dollar sentiment has moderated significantly through the past several weeks of trading. Our aggressively bullish USD forecast initially showed promise on the Greenback's noteworthy bounce. Yet currency traders clearly had other things in mind, and the Euro/US Dollar pair now finds itself near key year-to-date highs. Near-neutral positioning leaves scope for further Euro strength, US Dollar weakness.

British Pound/US Dollar Options Analysis

Similar to the Euro/US Dollar currency pair, forex options sentiment on the British Pound/USD has moderated significantly through recent trading. Whereas traders were previously bullish, risk-reversals now show that positioning is near neutral. It is interesting to note that Futures traders remain the most bullish the GBP/USD since it traded above 1.90, but the data nonetheless shows that speculators are net-short the currency pair. We see scope for continued GBP/USD pullbacks, but our aggressive bias has moderated.

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. We continue to 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.

US Dollar/Canadian Dollar Options Analysis

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. Forex options markets likewise show that traders are increasingly betting on USDCAD weakness—emphasizing that sentiment remains extremely bearish. Given such headwinds, we believe that the USDCAD downtrend is near its end. Yet we would need to see signs of reversal in price before taking a more aggressive stance.

US Dollar/Swiss Franc Options Analysis

Forex options and futures data shows US Dollar/Swiss Franc sentiment as fairly mixed, leaving little scope for a sustained turnaround. Indeed, the USDCHF has already fallen to fresh year-to-date lows on the sizeable dollar decline. Sentiment is not yet at extremes, and we have no real basis in calling for a near-term bounce.

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 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 remain bearish the AUDUSD.

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. 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. Already we see that traders have pulled back on extremely one-sided sentiment. Yet we see room for further corrections and accordingly remain bearish.

Written by David Rodríguez, Quantitative Strategist for,