A surge in the US S&P 500 leaves the correlated US Dollar (ticker: USDOLLAR) trading near significant multi-week lows to start the week, month, and quarter. The next moves may prove pivotal in determining broader US Dollar trends.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
DailyFX PLUS System Trading Signals –The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trades near multi-week lows as the S&P 500 trades near multi-year highs, and it will be critical to watch how currencies start the week, month, and quarter. We are major proponents of using seasonal cycles to gain an edge in forex trading. That is, the first period can often set the trend for the day, week, month, quarter, and even year. Do sharp Dollar declines on Monday and the first trading day of the month and Q2 point to further weakness? Whether or not the Dow Jones FXCM Dollar Index closes below 9900 could go a long way in answering that question.
We are left with some questions as far as trading strategy is concerned. A Dollar breakdown would favor trading trends such as Euro/US Dollar and British Pound/US Dollar strength. Yet a hold of Greenback support would leave us in a broad choppy range.
As we wrote last week, however, extremely low Forex Options market volatility readings suggest few expect major moves. All else remaining equal, this would favor calls for directionless trade. Yet low volatility likewise tends to favor losses in the safe-haven US Dollar. Will it be enough to point to another three months of losses? The next several days of trading may prove pivotal.
Volatility expectations continue to trade near their lowest levels since 2007. We do not expect major FX Moves until options traders position themselves for major currency breakouts.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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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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