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US Dollar Primed for Losses as Forex Volatility Tumbles

US Dollar Primed for Losses as Forex Volatility Tumbles

2012-03-26 16:00:00
David Rodriguez, Head of Product
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Forex market volatility expectations and the S&P 500 Volatility Index (VIX) continue to trade at multi-year lows, and we broadly expect the US Dollar (ticker: USDOLLAR) to hit fresh troughs against the Euro and other key counterparts.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_us_dollar_forecast_body_Picture_1.png, US Dollar Primed for Losses as Forex Volatility Tumbles

DailyFX PLUS Trading Signals The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) last week failed at significant resistance while the S&P 500 trades just short of multi-year highs. Given such strong trends, we have little choice but to broadly favor a US Dollar downtrend against the Euro, Australian Dollar, New Zealand Dollar, and other forex counterparts. For more details on the correlation between volatility, the S&P 500, and the US Dollar view the weekly strategy outlook webinar.

The fact remains that the US Dollar remains strongly correlated to volatility—be it our DailyFX Volatility Indices or the S&P 500’s VIX. And both currencies and stock market volatility expectations trade near multi-year lows, which favors slow but steady US Dollar declines.

Our DailyFX PLUS Trading Signals bias thus favors anti-dollar moves against the Euro, Aussie, Canadian Dollar, British Pound, and other key counterparts until further notice. Breakouts seem less attractive, while range trading could work on several non-USD currency pairs.

Market Conditions:

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.

forex_strategy_outlook_us_dollar_forecast_body_Picture_2.png, US Dollar Primed for Losses as Forex Volatility Tumbles

--- 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.

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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