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US Dollar at Critical Levels to Start Week, Month, and Quarter

US Dollar at Critical Levels to Start Week, Month, and Quarter

2012-04-02 19:00:00
David Rodriguez, Head of Product

A surge in the US S&P 500 leaves the correlated US Dollar (ticker: USDOLLAR) trading near significant multi-week lows to start the week, month, and quarter. The next moves may prove pivotal in determining broader US Dollar trends.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_trading_strategy_outlook_us_dollar_body_Picture_1.png, US Dollar at Critical Levels to Start Week, Month, and Quarter

DailyFX PLUS System Trading SignalsThe Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trades near multi-week lows as the S&P 500 trades near multi-year highs, and it will be critical to watch how currencies start the week, month, and quarter. We are major proponents of using seasonal cycles to gain an edge in forex trading. That is, the first period can often set the trend for the day, week, month, quarter, and even year. Do sharp Dollar declines on Monday and the first trading day of the month and Q2 point to further weakness? Whether or not the Dow Jones FXCM Dollar Index closes below 9900 could go a long way in answering that question.

We are left with some questions as far as trading strategy is concerned. A Dollar breakdown would favor trading trends such as Euro/US Dollar and British Pound/US Dollar strength. Yet a hold of Greenback support would leave us in a broad choppy range.

As we wrote last week, however, extremely low Forex Options market volatility readings suggest few expect major moves. All else remaining equal, this would favor calls for directionless trade. Yet low volatility likewise tends to favor losses in the safe-haven US Dollar. Will it be enough to point to another three months of losses? The next several days of trading may prove pivotal.

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_trading_strategy_outlook_us_dollar_body_Picture_2.png, US Dollar at Critical Levels to Start Week, Month, and Quarter

--- 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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