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US Dollar Forecast to Gain on Key Market Shift

US Dollar Forecast to Gain on Key Market Shift

2014-01-02 16:00:00
David Rodriguez, Head of Product
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- Dollar starts the year higher as volatility comes back in an important way-Our focus shifts towards Dollar-buying via our Breakout2and Momentum2systems- Forex volatility prices and rising US Treasury yields keep us focused on Dollar gains

The US Dollar has started the year with strength, and a sharp shift in market dynamics suggests the USD may continue to gain versus the Euro and other counterparts. Why?

Forex Volatility Prices Have Bounced Notably, Favoring Dollar Gains

forex_trading_us_dollar_forecast_to_gain_further_body_Picture_1.png, US Dollar Forecast to Gain on Key Market Shift

Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations

We wrote last week of the significance of a major shift in Fed policy and the importance of the turn in volatility in FX markets: both are likely to be US Dollar-positives. So how do we trade it?

Dow Jones FXCM Dollar Index Remains Heavily Correlated to Volatility

forex_trading_us_dollar_forecast_to_gain_further_body_Picture_2.png, US Dollar Forecast to Gain on Key Market Shift

The volatility shift favors a stronger dollar, and as such the obvious choice would be to get long the Greenback versus major currencies. Our volatility-friendly Breakout2 system and trend-following Momentum2 strategies are in a good position to buy into US Dollar strength.

Take a look at full strategy preferences below and sign up for future e-mail updates via my distribution list.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_trading_us_dollar_forecast_to_gain_further_body_Picture_3.png, US Dollar Forecast to Gain on Key Market Shiftforex_trading_us_dollar_forecast_to_gain_further_body_Picture_4.png, US Dollar Forecast to Gain on Key Market Shift

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--- 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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