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US Dollar Forecast Targets Lows as S&P 500 at Highs, Vols Tumble

By , Quantitative Strategist
19 March 2012 20:00 GMT

Forex market volatility has dropped to multi-year lows, and the safe-haven US Dollar looks to trade softer as AUDUSD, EURUSD, GBPUSD target fresh highs.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

us_dollar_forecast_to_fall_further_body_Picture_1.png, US Dollar Forecast Targets Lows as S&P 500 at Highs, Vols Tumble

DailyFX PLUS System Trading SignalsThe Dow Jones FXCM Dollar Index (ticker: USDOLLAR) has failed at significant resistance as the S&P 500 trades to multi-year highs. Indeed, we believe that the US Dollar is likely to head lower into the end of March. Cross-market correlations emphasize that exceedingly low forex market and S&P 500 volatility expectations favor US Dollar weakness. And indeed our DailyFX PLUS strategies are heavily short USD across the board.

Our strategy biases generally favor slow but steady USD declines. A noteworthy exception is the USDJPY, and indeed the Japanese Yen seems to have set a significant top (USDJPY bottom) through February.

We generally expect that FX options market volatility expectations will remain low through the foreseeable future. Our 1-month Volatility Index is now near its lowest levels since the onset of the global financial crisis in 2007-2008. The stock market equivalent in the S&P 500 Volatility Index (VIX) shows the same. Obviously conditions can and do change very rapidly, but the current market environment favors US Dollar weakness and generally slower currency volatility.

Market Conditions:

Volatility expectations are exceedingly low and show no real signs of turning. Although they can and do change quite rapidly, depressed volatility levels point to slow market trends and range trading through the foreseeable future.

us_dollar_forecast_to_fall_further_body_Picture_2.png, US Dollar Forecast Targets Lows as S&P 500 at Highs, Vols Tumble

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

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.

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.

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19 March 2012 20:00 GMT