Article Summary: The US Dollar has kept to a tight trading range against the Euro, Japanese Yen, and other major counterparts. How can we trade current price action?
DailyFX PLUS System Trading Signals – The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) remains above critical support, and we believe that the Greenback is setting up for a large move higher. Yet we argue there are two critical reasons for which the USD hasn’t broken higher: forex volatility and positioning.
On the volatility front, we see that 1-week FX options prices have fallen to their lowest levels since January—arguably quite bullish for the US currency. Yet it’s likewise worth noting that 1 and 3 month volatility prices are trading slowly but surely higher. How do we make sense of this?
Forex Volatility Prices Continue Trading near Year-to-Date Lows
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
There’s not much in terms of major forex event risk in the days ahead, but all eyes remain fixated on what should be a big month of September. Said fact may help explain why 1-month volatility prices are considerably higher than 1-week levels.
In the meantime we maintain a “wait and see” approach on market conditions and trading strategies. We’ll stick to the sentiment-based trading systems which have done fairly well through recent price action; past performance is certainly not indicative of future results but we’ll respect their recent moves.
We’ll tread lightly as any shift in market conditions could change our strategy preferences quite rapidly. Sign up for e-mail updates via my distribution list for any updates.
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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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.