Forex Volatility Likely, but will the US Dollar Finally Break Resistance?
- Forex volatility prices pick up ahead of potentially significant US Nonfarm Payrolls report
- Watch critical price levels for both the US Dollar and Japanese Yen for big moves
- Cross-market correlations suggest a USD breakout would coincide with major S&P 500 volatility
The US Dollar trades near key resistance versus the Euro, British Pound, and others. Is this the week we finally see a larger breakout?
All eyes to the highly-anticipated US Nonfarm Payrolls report—historically the single-largest market moving event on the economic calendar—as the USD trades at critical levels across the board.
A jump in short-term FX volatility prices shows that traders predict potentially big moves for the Greenback, but that’s far from a guarantee that the US currency will break key highs. And indeed barring current conditions suggest that major currencies will stick to their broad trading ranges until further notice.
One potentially significant caveat is that the Japanese Yen in particular trades at major levels versus the USD, Euro, Australian Dollar, British Pound, and other currencies. Cross- market correlations suggest that a Japanese Yen breakdown would likely coincide with a substantial flare-up in financial market tensions and vice versa. Watch the S&P 500 and broader risky assets given risks of unexpected FX market volatility.
Short-term Volatility Prices Rise Ahead of US Nonfarm Payrolls Report
Data source: Bloomberg, DailyFX Calculations
Our strategy and currency outlook is admittedly mixed given overall market indecision. On the one hand, a US Dollar and/or Japanese Yen breakout would likely lead to substantial exchange rate moves. Yet the odds point to further range-bound price action in the days ahead. We will cautiously look to our volatility-friendly Breakout2 system in a handful of JPY pairs, while our trend-following Momentum2 strategy may do well among fast-moving USD pairs.
See the table below for full detail on market conditions and preferred trading strategies.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
Understand the Breakout2 Trading System via our previous article
Auto trade the trend reversal-trading Momentum2 system via our previous article.
Trade with strong trends via our Momentum1 Trading System
Use our counter-trend Range2 Trading system
--- 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.
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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.
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