The US Dollar (ticker: USDOLLAR) trades near make-or-break levels against the Euro, British Pound, and Japanese Yen ahead of critical FX market event risk – how do we set our trading biases amidst clear uncertainty?
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
DailyFX PLUS System Trading Signals –The US Dollar (ticker: USDOLLAR) continues to trade below key support versus the Euro and British Pound, but Dollar resilience versus the Japanese Yen and other key counterparts sets the stage for a make-or-break week for the US currency. FX Options markets show that 1-week volatility expectations are at monthly highs ahead of four key central bank interest rate decisions and US labor market data.
The Dow Jones FXCM Dollar Index currently trades in a progressively narrower price triangle formation—pointing to an imminent break. As such we’ll cautiously position ourselves for mostly range trading across key pairs absent the major breakout or breakdown in the USDOLLAR.
As far as the DailyFX PLUS Trading Signals systems go, this means favoring “Range2”/”Congestion Opportunities” trades until further notice. It’s critical to note that this bias can and will likely change on a major USD breakdown. But we’ll be sure to update our biases accordingly as conditions dictate.
Market Conditions:
FX Options volatility expectations continue near five-year lows, but it’s critical to note that our 1-week Volatility Index has jumped to monthly highs ahead of a pivotal week for US Dollar pairs. The clear jump in vols warns of imminent breakout and could soon force us to shift our strategy trading biases.
The important divergence between volatility and the Dow Jones FXCM Dollar Index likewise suggests that the safe-haven USD could continue to outperform despite unfavorable market conditions.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.
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.
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