Forex Strategy Outlook: We Like Japanese Yen and US Dollar Shorts

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

DailyFX+ System Trading Signals –A noteworthy bounce in volatility expectations improves chances for volatility-friendly Breakout Opportunities trades in the days ahead. The system has generally underperformed given that it has tried to buy the Japanese Yen (Sell GBPJPY, AUDJPY, EURJPY) into fairly significant weakness. It seems imprudent to go against Euro, British Pound, and Australian Dollar strength against the fast-falling Yen. Yet going with the trend (long EURJPY, GBPJPY, AUDJPY) could work well and we might take these trades.

We similarly will likely avoid long-JPY pairs as seen through Optimal Entry. The possible exception is the USDJPY, which as recently broken to fresh lows. It looks attractive to sell into USDJPY rallies as the pair may soon fall to fresh lows.

Market Conditions:

The 3-month DailyFX Volatility Index recently traded within a fairly well-defined uptrend channel, and it seems like markets are primed for further sharp moves in the weeks ahead. We like betting on further currency breakouts, but the key is to trade breakouts into the direction of the trend. We’ll be keeping an eye out for signals that go short the US Dollar and the Japanese Yen in particular.

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

To contact David, e-mail drodriguez@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

Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near monthly lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s monthly range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

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