Currency trading market conditions have been especially difficult to anticipate through recent trade, as broader financial markets have remained in an uncomfortable directionless chop. Our DailyFX 3-Month Volatility index remains above the historically significant 10 percent mark, but individual currency pairs nonetheless remain near the midpoint of their calendar year trading range. Such price action suggests that we may see further Rangebound price action in the week ahead. Our conviction in this call is relatively weak, however, as we feel there are continued risks of a short-term flare-up in market tensions and price volatility.
Preferred Strategies
Discretionary Strategy Outlook
Tops and Bottoms – Given uncertain market conditions, our difficult-to-classify “Finding Tops and Bottoms” report is our preferred strategy in the week ahead. If nothing else, the “Tops and Bottoms” trading signals have banked respectable profits through recent trade—catching the Euro’s surprising break to the topside. Though there is no set trading style, the prospect of catching short-term Tops and Bottoms seems promising in the midst of nebulous price action.
Pairs to Range Trade – Major currencies saw breakouts of varying degrees through recent trading—damaging the otherwise solid prospects of major range trading strategies. That said, we are unsure of whether we can see price follow-through in the near term; given the broader directionless price action, we will claim that the “Pairs to Range Trade” report may offer attractive setups in the week ahead. Of course, traders must be mindful of the potential for adverse intraday moves and manage position size accordingly.
Speculative Sentiment Index Trading Signals – Our Speculative Sentiment Index clearly anticipated the Euro’s breakout to the topside and other key moves, but SSI trading signals have otherwise produced lackluster results through recently sideways markets. Our uncertain outlook leaves us with little choice but to claim that traders should use SSI trading signals with less size or not at all until market conditions become clearer.
Systems Outlook
Dynamic Carry Trade Basket – Please see our weekly report on Carry Trades for a better idea on what to expect through short-term trade: A Carry Trade Breakout a Matter of Time as Earnings and Credit Crowd Headlines.
Technical Analyzer and Signals from Thomson IFR – Use own discretion to filter through IFR or Technical Analyzer signals in the week ahead.
Chart 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 calendar year 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 calendar-year range.
Trend – This indicator measures trend intensity by telling us where price stands in relation to its 52-week range. A very low number tells us that price is currently at or near yearly 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 annual range.
