Dollar Shows Early Signs of Reversal - Here's What We’re Watching
- Yet the Greenback has reversed versus Aussie, Cable
- A pick up in volatility would help confirm Dollar reversal
We have favored selling into Greenback weakness almost across the board, but our sentiment-based trading strategies have most recently bought the US currency versus the British Pound and Australian Dollar (sold GBPUSD and AUDUSD).This in itself isn’t enough of a reason to call for a much larger market reversal. And yet we’ll keep a close eye on trader sentiment and price action in the coming days.
One thing working against the US Dollar is extremely low forex market volatility. The safe-haven currency tends to do well in times of market turmoil, and the fact that volatility prices are near multi-year lows helps explain why the Dow Jones FXCM Dollar Index trades at its lowest since February.
A busy week of forex economic event risk could finally bring the kind of market volatility necessary for a bigger Greenback reversal, but as it stands traders are pricing in very slow market moves in the days and weeks ahead.
Forex Volatility Prices Remain Extremely Low and a Dollar Reversal Seems Unlikely
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
Our trading preference thus remains with our trend-following Momentum2 trading strategy until further notice. Past performance is NOT indicative of future results, but the system has done well trading the USD to fresh lows and has most recently switched direction on key pairs.
See full detail on our trading biases in the table below, and sign up for e-mail updates via my distribution list for any changes.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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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.