Fresh multi-year Euro lows against the US Dollar (ticker: USDOLLAR) have produced an important jump in forex volatility—offering attractive trading opportunities in the week ahead.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
DailyFX PLUS System Trading Signals –The Euro has started the week sharply lower against the US Dollar (ticker: USDOLLAR), and continued EUR weakness could be just enough to drive broader currency volatility in the days ahead. Last week we warned that our DailyFX Volatility Indices were at their lowest levels since May as traders positioned themselves for small currency moves. Yet a sharp late-week EURUSD sell-off set the stage for stronger volatility into the days ahead.
Our proprietary Speculative Sentiment Index-based trading strategies are now aggressively short the Euro against the US Dollar, and we think such trades have a fair chance at success. Said systems have likewise bought into Japanese Yen surges, and Euro and Yen pairs may offer attractive opportunities to play strong market indecision in the days ahead.
The Euro and Japanese Yen are somewhat unique in this regard, however; currencies such as the Australian and New Zealand dollars remain relatively strong against the US Dollar.
Continued European turmoil has the potential to create volatile market conditions across broader forex markets, and the Japanese Yen continues to strengthen within a broader uptrend. We’ll concentrate on EUR and JPY pairs until further notice, as trading conditions seem far more ambiguous across broader US Dollar pairs.
Market Conditions:
Forex options volatility expectations have jumped noticeably across Euro and Japanese Yen currency pairs, but it’s important to note that it has not been enough to force a more substantial breakout across the board. The divergence has fairly clear implications for price action—any strong price moves seem likely to be limited to the EUR and JPY. For other pairs we might expect some sympathetic intraday volatility, but we see risks that trading conditions may remain challenging in non EUR and JPY currency pairs. We will shift our strategy biases accordingly.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
To contact David, e-mail drodriguez@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 monthly 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 monthly 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.
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