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US Dollar and Japanese Yen Poised for Major Reversals

By , Quantitative Strategist
29 July 2013 15:55 GMT

Article Summary: It’s a critical week in forex markets as we eye top-tier event risk. What does it mean for US Dollar trading? These key indicators warn of major reversals.

DailyFX PLUS System Trading Signals The US Dollar and Japanese Yen look to big forex market volatility on a critical week of economic event risk, and indeed a sharp jump in FX volatility prices emphasizes that major pairs could see big moves ahead.

Studies of forex market cycles suggest this could likewise be a big week for several US Dollar currency pairs—our Senior Market Strategist believes the EURUSD, GBPUSD, USDJPY, and Gold prices are at key risk of short-term turnaround.

It’s particularly worth noting that short-term forex market volatility prices have surged near their highest levels of the year, while longer-dated volatility prices have remained stable.

We often see such huge divergences near key market turning points, and indeed we’re on the lookout for price extremes in the US Dollar and Japanese Yen in particular.

Forex Options Market Volatility Prices From 2012-2013

forex_us_dollar_forecast_to_see_big_moves_ahead_body_Picture_1.png, US Dollar and Japanese Yen Poised for Major Reversals

Source: OTC FX Options Prices, CBOE Data from Bloomberg; DailyFX Calculations

Our outlook for our automated sentiment-based trading strategies is admittedly less clear than usual. The strategies have mostly done well selling into US Dollar weakness. Given risk of short-term dollar turnaround, however, said strategies could give back some of their recent gains on any such reversal.

We’ll tread lightly in the week ahead—limiting exposure ahead of top-tier economic event risk. If this is truly the start of a Dollar reversal, there may be ample opportunity to latch onto USD strength through the foreseeable future.

Sign up for e-mail updates via my distribution list for any updates this week and in the future, and see the full strategy preference breakdown in the table below:

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_us_dollar_forecast_to_see_big_moves_ahead_body_Picture_2.png, US Dollar and Japanese Yen Poised for Major Reversals

forex_us_dollar_forecast_to_see_big_moves_ahead_body_Picture_3.png, US Dollar and Japanese Yen Poised for Major Reversals

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--- 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.

http://www.dailyfx.com/forex/technical/article/forex_strategy_corner/2013/02/04/forex_trading_strategy_against_the_trading_crowd.html

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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29 July 2013 15:55 GMT