DailyFX Research. DailyFX Forex Options Weekly Forecast

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1 FX Options sentiment and Futures positioning have long warned that the US Dollar could set an important bottom, and recent Dollar rallies suggest that we are in the midst of a major USD reversal from recent lows. We have admittedly been caught premature in our previous calls for a Greenback reversal, but the currency s recent gains suggest that this is exactly the turn we have been waiting for. Elevated FX Options market volatility expectations suggest we could continue to see major price swings in the week ahead. 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 52.12% 66.46% 95.24% 7.88% 37.20% 52.41% 74.40% 1-Month 77.36% 91.82% 64.29% 8.54% 27.04% 57.83% 69.88% 3-Month 85.53% 94.12% 61.73% 9.64% 25.31% 57.93% 69.64% 12-Month 68.21% % 70.20% 18.99% 10.97% 60.48% 79.75% DailyFX Volatility Index Percentiles Volatility Index 1 Week 2 Weeks 1 Month 3 Months 1 Year Indices 89.06% % 92.31% 89.23% 96.88%

2 Euro/US Dollar Options Analysis Continued declines in the Euro/US Dollar have likewise produced a similar correction in FX Options sentiment, and we continue to call for a sustained EURUSD reversal through upcoming trade. Our benchmark breakout-style trading system would have hypothetically closed its long-standing EURUSD-long position as of today. We wrote last week, CFTC Commitment of Traders data recently showed that Non-commercial traders were near their most net-long EURUSD since the pair traded above the 1.50 mark. If speculators suddenly shift to cover their long exposure, a wave of selling could force sharp EURUSD declines. This remains the case, and we believe the risk of a sustained Euro/US Dollar reversal is high.

3 British Pound/US Dollar Options Analysis Noteworthy pullbacks in the British Pound/US Dollar pair have led to similar corrections in FX Options sentiment. Yet our benchmark breakout-style trading system has hypothetically remained long since September 17 and is not close to covering said long position. The British Pound has remained relatively resilient in the face of substantive US Dollar strength, and it ostensibly has less room to fall if this is indeed a major USD reversal. Of note, CFTC Commitment of Traders data shows that Non-Commercial traders remain only marginally net-long the GBPUSD pair. This leaves less scope for sharp declines as traders cover their long positions.

4 US Dollar/Japanese Yen Options Analysis The Japanese Yen has reversed somewhat against the US Dollar, and extremely one-sided COT Non-Commercial positioning suggests that the USDJPY could continue to correct higher through near-term trade. Our FX Options Risk Reversals measures are comparatively neutral and do not give a great deal of information on what to expect through the short term. Indeed, both our Range and Breakout-style risk reversal systems have seen decidedly mixed performance in the USDJPY for quite some time now. If this is indeed a major US Dollar reversal, we may claim that the USDJPY has set an important bottom and the pair may rally as traders cover short positions.

5 US Dollar/Canadian Dollar Options Analysis The USDCAD has shown signs of noteworthy reversal, but FX Options sentiment remains relatively bearish and our benchmark breakout-style trading system hypothetically remains short. Said system hypothetically sold at sentiment extremes on September 16 and is not particularly close to covering said short position. Yet a broader US Dollar reversal would likely lead to further short covering and a USDCAD test of range highs above

6 US Dollar/Swiss Franc Options Analysis Our USDCHF bias remains essentially unchanged from last week, and we believe that the pair has set an important bottom through recent trade. Some time ago we wrote: Our benchmark Breakout-style FX Options risk reversal system hypothetically went short the USDCHF as of June 18 and has since remained short. With the risk reversal crossing back above its 30 th percentile, however, said position is now closed. Extremely one-sided CFTC COT Non-commercial positioning suggests that further short-covering could force substantive USDCHF rallies.

7 Australian Dollar/US Dollar Options Analysis A sharp turn lower in the Australian Dollar suggests that it may have set an important top against the recently resurgent US Dollar. Some time ago we wrote that our Breakout-style risk reversals trading system would have theoretically gone long the AUDUSD from September 3 at which point the Australian Dollar was trading at approximately $ Said system has closed that position as of today, and further losses seem likely. Very one-sided CFTC Commitment of Traders Non-Commercial positioning warns that the pair may see sharp declines if speculators close their positions en masse.

8 New Zealand Dollar/US Dollar Options Analysis Our NZDUSD bias is quite similar to the AUDUSD, as our Breakout-style trading system has closed its long-standing buy as of today. Non-commercial futures positioning remains near its most net-long the NZDUSD since the pair topped in late 2010, and we may see a similar situation unfold if the more recent high holds. The risk of sharp declines is high if traders decide to cover their one-sided long positions in a hurry. Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com To be added to this author s distribution list, send an subject line Distribution list to drodriguez@dailyfx.com