– Dollar unlikely to see big moves this week, but we’re watching key factors that point to a big 2014
-We’ll remain flat on our sentiment-based trading strategies until the New Year
– Forex volatility prices will remain a major focus in the weeks and months ahead

We’re watching for major US Dollar moves in the New Year, and indeed several key factors help confirm it could be the year for the Greenback. What are we watching?

Forex Volatility Prices Remain Low in Short-Term, but Long End Points to Big Moves
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations

The next several days of price action will probably be quiet, and low forex market volatility prices suggest that few are betting on or hedging against big moves. Yet the more interesting dynamic is watching what’s going on in longer-dated options: the 1-month and 3-month DailyFX volatility indices are hitting their highest on the quarter. Why?

We wrote last week of the significance of the US Federal Reserve’s “Taper” of Quantitative Easing, and it’s difficult to overstate its potential impact on currencies. One place where the shift is clear is volatility expectations.

Dow Jones FXCM Dollar Index Remains Heavily Correlated to Volatility

The link between FX volatility and the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) remains strong, and it tells us that watching the next moves in vols will be critical in the New Year.

We’ll remain flat until full market liquidity returns in the first full week of trading in 2014. Yet the potential for a significant return to volatile FX markets bodes well for our volatility-friendly and trend-following forex trading strategies.

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.
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.

Source: Daily fx