Article Summary: The US Dollar has traded to fresh monthly lows against the Euro and other key currencies, while the Japanese Yen trades beyond major support levels. Extremely low forex options market volatility expectations support the case for further JPY and USD weakness.
Pronounced downtrends in the US Dollar and Japanese Yen have made for powerful trend trading through recent price action, and we see scope for continued outperformance in several trend trading strategies. The Euro trades at fresh monthly highs against the US Dollar and 7-month peaks against the Japanese Yen.
The trend is up until it isn’t, and we won’t go against the recent EURUSD and EURJPY uptrends unless (USD and JPY downtrends) until there are real signs of capitulation. In the meantime our trend-based “Tidal Shift/Momentum2” trading system remains our preferred strategy across a range of USD and JPY pairs.
The probabilities of an important USD and JPY reversal have clearly grown as both currency have fallen sharply from recent peaks; further bets on continued weakness are clearly risky. Yet we see few important signs of capitulation, and indeed we would argue that buying into US Dollar and Japanese Yen weakness seems far more risky.
Seasonal trends show that the end of the month/beginning of the new trading month can often bring changes in trend. But we’ll need to see real signs of reversal before advocating a shift in general trading bias.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
Market Conditions:The US Dollar has traded to fresh monthly lows amidst exceedingly low FX market volatility. Any important reversals for the safe-haven US currency may need to wait for a similarly significant shift in market conditions. FX options continue to show the lowest volatility expectations since 2007—arguably supporting further USD and JPY weakness.
DailyFX Volatility Indices from 2011-2012
--- 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.