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Forex Strategy: Trading US Dollar and Japanese Yen Weakness

By , Quantitative Strategist
11 December 2012 17:30 GMT

Article Summary: The US Dollar and Japanese Yen are positioned for further losses as slow market conditions hurt the safe-haven currencies. We will trade the US Dollar and Japanese Yen downtrends until a shift in forex conditions.

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) may fall further across the board as complacent forex traders show little interest in buying the safe-haven currency amidst the lowest volatility in five years.

The US Dollar trades at fresh multi-month lows versus the Australian Dollar and near year-to-date troughs versus the New Zealand Dollar as traders favor high-yielding currencies against the US Dollar. Indeed, long-term correlations suggest that the US currency may continue to fall amidst clearly low forex market volatility expectations.

As a result, we favor trading our trend-following “Tidal Shift/Momentum2” trading system across the majority of USD currency pairs as we take positions in favor of further Dollar weakness. We prefer selling the Japanese Yen for much the same reason—AUDJPY and NZDJPY trade at significant peaks.

As with all trends, there remains risk that US Dollar and Japanese Yen downtrends may soon end. Yet sharp reversals seem unlikely when FX options traders are currently pricing in the smallest market moves in five years.

Our DailyFX Volatility Indices show that very few fear big moves into year-end, and we accordingly see little risk of material USD and JPY bounces. If market conditions change, we will change our biases to match them.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_us_dollar_japanese_yen_body_Picture_1.png, Forex Strategy: Trading US Dollar and Japanese Yen Weakness

Market Conditions:Forex options markets are pricing in the smallest currency moves sin five years, and very few show fears of important volatility through the coming weeks and months. We see little alternative but to position ourselves for slow market moves ahead.

DailyFX Volatility Indices from 2011-2012

forex_strategy_us_dollar_japanese_yen_body_Picture_2.png, Forex Strategy: Trading US Dollar and Japanese Yen Weakness

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

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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 90-day 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 90-day 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.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.

OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

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11 December 2012 17:30 GMT