US Dollar and Japanese Yen Poised for Major Reversals
Article Summary: It’s a critical week in forex markets as we eye top-tier event risk. What does it mean for US Dollar trading? These key indicators warn of major reversals.
DailyFX PLUS System Trading Signals – The US Dollar and Japanese Yen look to big forex market volatility on a critical week of economic event risk, and indeed a sharp jump in FX volatility prices emphasizes that major pairs could see big moves ahead.
Studies of forex market cycles suggest this could likewise be a big week for several US Dollar currency pairs—our Senior Market Strategist believes the EURUSD, GBPUSD, USDJPY, and Gold prices are at key risk of short-term turnaround.
It’s particularly worth noting that short-term forex market volatility prices have surged near their highest levels of the year, while longer-dated volatility prices have remained stable.
We often see such huge divergences near key market turning points, and indeed we’re on the lookout for price extremes in the US Dollar and Japanese Yen in particular.
Forex Options Market Volatility Prices From 2012-2013
Source: OTC FX Options Prices, CBOE Data from Bloomberg; DailyFX Calculations
Our outlook for our automated sentiment-based trading strategies is admittedly less clear than usual. The strategies have mostly done well selling into US Dollar weakness. Given risk of short-term dollar turnaround, however, said strategies could give back some of their recent gains on any such reversal.
We’ll tread lightly in the week ahead—limiting exposure ahead of top-tier economic event risk. If this is truly the start of a Dollar reversal, there may be ample opportunity to latch onto USD strength through the foreseeable future.
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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.
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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