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US Dollar Looks Like a Sell for These Reasons

By , Quantitative Strategist
10 March 2014 15:35 GMT

- US Dollar looks at risk as it breaks to significant lows

- Fundamental forecasts likewise favor a weaker Greenback

- The fact that the S&P 500 closed at fresh records leaves the Dollar at risk

The US Dollar looks to trade to fresh lows versus the Euro and other major forex counterparts. Why? And which trades are we watching?

A EURUSD break above major trendline represents a clear danger for the suddenly-downtrodden US currency, and indeed there seems to be relatively little in the way of fresh multi-year highs for the single currency (lows for the USD).

DJ FXCM Dollar Index Breaks Important Support, Looks to Fresh Lows

forex_us_dollar_trading_setups_for_week_ahead_body_Picture_1.png, US Dollar Looks Like a Sell for These Reasons

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

The Dow Jones FXCM Dollar Index has subsequently fallen to its lowest levels since November and our fundamental forecast calls for further losses absent a material shift in market conditions.

Why exactly? The Dollar tends to do poorly as the S&P 500 and broader ‘risk’ does especially well. Given that major financial markets have shrugged off risk of further geopolitical turmoil in Ukraine , there seems to be little in the way of further stock market gains.

A sharp drop in forex volatility prices likewise shows few expect currency markets to see big moves in the week ahead. Quiet market conditions could likewise hurt demand for the safe-haven US Currency.

Forex Volatility Prices Tumble, Favoring Slower Price Moves Ahead

forex_us_dollar_trading_setups_for_week_ahead_body_Picture_2.png, US Dollar Looks Like a Sell for These Reasons

Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations

We’ll watch any opportunities to sell the US Dollar with special interest, and the only real exception is against the Japanese Yen. Our Senior Technical Strategist points out why buying the dip in USDJPY may be attractive in the week ahead.

The table below highlights which trading strategies we think may do well in the days ahead. Sign up for future e-mail updates via my distribution list.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_us_dollar_trading_setups_for_week_ahead_body_Picture_3.png, US Dollar Looks Like a Sell for These Reasons

forex_us_dollar_trading_setups_for_week_ahead_body_Picture_4.png, US Dollar Looks Like a Sell for These Reasons

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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.

10 March 2014 15:35 GMT