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US Dollar and Japanese Yen on the Verge of Something Huge

US Dollar and Japanese Yen on the Verge of Something Huge

David Rodriguez, Head of Product

Article Summary: It could be a pivotal week for forex and broader markets as cyclical studies and key volume indicators show we’re on the verge of something big. Here’s how we’re trading.

DailyFX PLUS System Trading Signals It’s shaping up to be a another critical week and month for financial markets and especially key forex pairs, as early signs of broad market deleveraging and potential panic warn of potentially massive moves ahead.

We hate using hyperbole, but there is fairly clear evidence that we’re in the early stages of a financial market panic. Why? One of the clearest signs is arguably that both the S&P 500 and US Treasury bond markets sold off hard last week. As we wrote two weeks ago, that’s not supposed to happen and simply warns that popular trades may quickly be unwound on any episodes of market panic. Cyclical studies likewise suggest June could be huge for stock markets, and even the “Hindenburg Omen” warns of big moves ahead.

What does that mean for FX traders? We’ve recently claimed that any such stock market sell-offs could coincide with fairly significant dollar strength, but our Senior Technical Strategist points out that the US Dollar might actually be at risk as one of the most crowded speculative trades in currency markets.

Instead we’ll likely turn to the Japanese Yen as one of the most attractive trades in the days and weeks ahead. As we’ve written in the past two weeks, there is material risk of a major JapaneseYen reversal. This could make the USDJPY in particular one of the most attractive trades through the foreseeable future.

I’ve said it before but it bears repeating: it ‘feels’ like markets have been volatile, and they have been. But a simple look at volatility prices (chart below) suggests this could be only the beginning for major forex market moves.

Forex Options Market Volatility Prices Across Major Pairs

forex_strategy_us_dollar_major_break_trade_setups_body_Picture_1.png, US Dollar and Japanese Yen on the Verge of Something Huge

Source: OTC FX Options Prices from Bloomberg, DailyFX Calculations

Our strategy trading biases are a bit more nuanced than usual. We think that, all else remaining equal, the Dollar stands to rally further across the board on its recent momentum. Yet we can’t ignore the fact that a potentially significant market deleveraging could actually hurt the USD.

In terms of our sentiment-based trading strategies, we’ll look to the volatility-friendly Breakout2 trading system with focus on the USDJPY and other JPY pairs.

Elevated volatility expectations suggest that the breakout strategy may continue to do well, while the trend-following Momentum2 strategy could improve if we see more consistent directional moves. Finally, Range2 is not in a great position as volatility hits fresh peaks.

View the table below to see our strategy preferences broken down by currency pair.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_us_dollar_major_break_trade_setups_body_x0000_i1026.png, US Dollar and Japanese Yen on the Verge of Something Hugeforex_strategy_us_dollar_major_break_trade_setups_body_1a.png, US Dollar and Japanese Yen on the Verge of Something Huge

It’s shaping up to be a big week and month for the Greenback, and I haven’t even discussed top forex economic event risk. Top-tier reports such as the US Nonfarm Payrolls release could ultimately serve as catalysts for the move. Keep track of top event risk on the DailyFX Economic Calendar.

View how to automate the high-volatility Breakout2 Trading System via our previous article and webinar recording

Auto trade the trend reversal-trading Momentum2system via our previous article and webinar recording.

Use our counter-trend Range2 Trading system and view an archived webinar guide on automation

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up to David’s e-mail distribution list via this link.

Contact David via

Twitter at http://www.twitter.com/DRodriguezFXFacebook at http://www.Facebook.com/DRodriguezFX

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.

http://www.dailyfx.com/forex/technical/article/forex_strategy_corner/2013/02/06/forex_crowd_breakout_trading.html

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

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