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Trading Strategies Go Long US Dollar but Next Moves Pivotal

By , Quantitative Strategist
09 April 2012 16:00 GMT

Sharp sell-offs in the US S&P 500 leave the US Dollar (ticker: USDOLLAR) poised to test major 8-month highs. Our sentiment-based DailyFX PLUS Trading Signals have gone long the US currency, but next moves may be pivotal.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_us_dollar_forecast_euro_s_and_p_500_body_Picture_1.png, Trading Strategies Go Long US Dollar but Next Moves Pivotal

DailyFX PLUS System Trading SignalsA sharp sell-off in the US S&P 500 leaves the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trading higher, and continued sell-offs in stock markets could leave the safe-haven US currency at fresh highs. Our sentiment-based DailyFX PLUS Trading signals have accordingly taken US Dollar long positions against the Euro, British pound, Australian Dollar, and Swiss Franc.

The critical question is whether the Dollar Index breaks 8-month lows. A sharp breakdown in the Euro/US Dollar pair means that focus is squarely on whether the EURUSD takes out significant congestion lows at $1.3000 and moves towards January’s lows near $1.2600.

Ultimately, however, such a US Dollar breakout would need to come on bigger moves across financial markets. Our FX Options market-based volatility indices remain quite low, and it is difficult to claim that current volatility readings support calls for big USD moves. Yet it serves to note that the S&P 500 Volatility Index (VIX) has broken above recent highs and suggests the S&P could continue its recent sharp moves.

Will it be enough to force a broader Dollar breakout? It’s difficult to say. Yet our sentiment-based currency trading signals remain long the USD based on recent moves and show little sign of flipping direction.

Market Conditions:

Forex options market-based volatility expectations remain low despite recent sharp US Dollar moves. Such depressed levels warn that major pairs could consolidate through the short-term, but a much larger gain in the stock-market based S&P 500 Volatility Index (VIX) suggests that currencies may be under-pricing risks of moves.

US Dollar pairs remain near critical support and resistance levels, and we’ll keep a close eye on our volatility readings on the DailyFX Technical Analysis page.

forex_strategy_us_dollar_forecast_euro_s_and_p_500_body_Picture_2.png, Trading Strategies Go Long US Dollar but Next Moves Pivotal

--- 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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09 April 2012 16:00 GMT