US Dollar Rally falls Short – Here’s What Could Change That

Article Summary: The Dollar remains higher through August but forecasts of major rallies have fallen short. What could force the Greenback back into its strong uptrend?

DailyFX PLUS System Trading Signals – The US Dollar remains higher against most major currencies through the month of August, but the Greenback failed to hold its gains versus the Euro and the Yen through disappointing Nonfarm Payrolls results. What’s next?

Last week we wrote that both the Dollar and Yen were poised for major reversals, and indeed we see evidence that the USDJPY may have set a noteworthy short-term bottom near ¥97.60.

Yet a sharp drop in forex market volatility prices suggests the week ahead could prove far less eventful. Indeed, a relatively empty FX economic calendar points to slower price action – what could change that?

Forex Options Market Volatility Prices From 2012-2013
Source: OTC FX Options Prices, CBOE Data from Bloomberg; DailyFX Calculations

Our Senior Technical Strategist believes that a sharp disparity between US Treasury markets and the S&P 500 points to a significant market turning point in the days and weeks ahead. Such reversals aren’t typically quiet—if the stock market does indeed turn lower it would likely happen on strong volatility.

We’ll tread lightly in the week ahead; a jump in volatility would likely favor our sentiment-based trading strategies, but positioning ourselves for a big change in market conditions seems speculative at this point. Instead we’ll stick to strategies that have been working reasonably well through recent price action.

Sign up for e-mail updates via my distribution list for any updates this week and in the future, and see the full strategy preference breakdown in the table below:

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
Automate our SSI-based trading strategies via Mirror Trader free of charge

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

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up to David’s e-mail distribution list via this link.

Contact David via
Twitter at http://www.twitter.com/DRodriguezFX

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.

http://www.dailyfx.com/calendar
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.Learn forex trading with a free practice account and trading charts from FXCM.
Source: Daily fx