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US Dollar Forecast Bearish as Forex Volatility Tumbles

US Dollar Forecast Bearish as Forex Volatility Tumbles

2012-07-02 15:00:00
David Rodriguez, Head of Product
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A sharp drop in forex market volatility warns that the safe-haven US Dollar (ticker: USDOLLAR) may do poorly against the high-yielding Australian Dollar, but critical economic event risk warns against complacency.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_us_dollar_forecast_australian_dollar_body_Picture_1.png, US Dollar Forecast Bearish as Forex Volatility Tumbles

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) may do poorly against high-yielders such as the Australian Dollar as forex options market volatility expectations fall sharply and point to slow market moves.

The safe-haven USD tends to outperform during times of market turbulence and often declines when markets are calm. According to our DailyFX Volatility Indices, price moves are expected to be their slowest since the beginning of May—just before a substantial USD surge and EURUSD decline.

It is admittedly difficult to explain why volatility is so low ahead of critical forex market event risk from the ECB, BoE, and US NFP report. Yet we won’t argue with market sentiment, and we see little choice but to favor Australian Dollar strength, a soft US Dollar, and potentially further Japanese Yen declines.

Strategy biases favor trend trades in key risk-sensitive pairs, while the Euro/US Dollar and others may stick to broad trading ranges.

In terms of the DailyFX PLUS Trading Signals strategies, we broadly favor trades in “Tidal Shift” (Momentum2) and in certain pairs “Congestion Opportunities” (Range2) strategies. Volatility will have to bounce significantly for us to view “Breakout Opportunities” (Breakout2) trades with any real optimism.

Market Conditions:

Forex options markets are pricing in a significant drop in volatility across major currency pairs, giving us fairly clear directional and strategy biases for the week ahead. Volatility is now at its lowest since markets saw significant tensions through the month of May. Conditions can and do change quite rapidly, but current volatility readings leave us firmly in favor of slower-moving range trading and trend trading strategies in the week ahead.

forex_us_dollar_forecast_australian_dollar_body_Picture_2.png, US Dollar Forecast Bearish 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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