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Forex Anaylsis: US Dollar Rally at Risk as Volatility Tumbles

Forex Anaylsis: US Dollar Rally at Risk as Volatility Tumbles

2012-11-19 17:00:00
David Rodriguez, Head of Business Development
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Article Summary: The US Dollar stands at potentially pivotal support against the Euro, Australian Dollar, and other key counterparts. Current forex market conditions bode poorly for the Greenback, and it will be critical to watch the Greenback’s next moves in a holiday-shortened week of trading.

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) trades at pivotal support levels versus the Euro as forex volatility tumbles – what do market conditions tell us about the Greenback’s next moves?

Marked indecision across forex traders and broader financial markets have made for choppy currency trading conditions through recent price action, and low volatility expectations suggests we could see similarly indecisive currency move sin the week ahead. The prices paid for forex trading options across major currency pairs have fallen to their lowest levels in five years as traders predict limited volatility across most pairs.

We noted last week that our retail FX sentiment-based indicator called for continued US Dollar strength, but an important pullback in volatility and the US Dollar itself puts said forecast at clear risk. The Dow Jones FXCM Dollar index has stalled at potentially significant trend channel resistance, and the next prove may be pivotal.

In the meantime, a hold above significant congestion support of 9990 on the USDOLLAR and keeping below $1.28 mark in the EURUSD would leave our short-term USD-bullish bias intact. In effect this means that our trading strategy preferences will remain fluid on US Dollar pairs until further notice. It will be a holiday-shortened week of trading for North America, but that doesn’t necessarily rule out significant moves across key markets..

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_us_dollar_euro_australian_dollar_body_Picture_2.png, Forex Anaylsis: US Dollar Rally at Risk as Volatility Tumbles

Market Conditions:Choppy forex price moves have coincided with a noteworthy decline in currency market volatility expectations. Given that the safe-haven US Dollar tends to do poorly in times of very low market volatility, we will need to see a bounce in volatility to keep confidence in our earlier calls for USD strength.

DailyFX Volatility Indices from 2011-2012

forex_strategy_us_dollar_euro_australian_dollar_body_Picture_1.png, Forex Anaylsis: US Dollar Rally at Risk as Volatility Tumbles

--- 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.

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

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