Dollar Thunders Higher, Traders Positioned for Further Strength

Article Summary: The US Dollar has broken higher, and traders have positioned themselves for further strength. We like buying USD against the AUD, EUR, JPY, and CHF in particular.

DailyFX PLUS System Trading Signals – What a difference a week makes. Last week we wrote that it could be a big week for the US Dollar as markets decided whether the month of May would produce Dollar strength or weakness.

Traders have spoken: the Euro, Japanese Yen, Australian Dollar, Swiss Franc, and other major currencies have broken decisively lower against the resurgent US currency.

The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trades at 3-year peaks.
On Friday we updated our trading biases as forex volatility prices surged, and indeed we still like buying into US Dollar strength across the board.

Perhaps the only important caveat is that we don’t know how long the safe-haven USD can continue hitting fresh peaks as the S&P 500 trades at record-highs. But there’s no natural law that says the Dollar has to weaken as stocks surge, and our fundamental forecast calls for Greenback strength.

1-Month Volatility Prices across Major Pairs versus Japanese Yen Pairs
Source: OTC FX Options Prices from Bloomberg, DailyFX Calculations

In terms of trading strategies, a surge in volatility prices leaves us broadly in favor of our volatility-friendly Breakout2 trading system as well as our trend-following Momentum2 strategy.

Last week we wrote that Range2 trades looked attractive on slow market moves, but the facts have changed and we must adapt to much more active conditions.

In terms of individual currency pairs, we continue to focus on the AUDUSD break below key support as well as a potentially substantial break higher in the USDCHF. The Japanese Yen is once again showing signs of life versus the US Dollar and other currencies, but it’s worth noting that last week’s gains in volatility were concentrated in non-JPY pairs.

View the table below to see our strategy preferences broken down by currency pair.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

View how to automate the high-volatility Breakout2 Trading System via our previous article and webinar recording

Auto trade the trend reversal-trading Momentum2system via our previous article and webinar recording.

Use our counter-trend Range2 Trading system and view an archived webinar guide on automation

— 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.
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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Source: Daily fx