A continued build in forex volatility prices promises big moves in US Dollar pairs through the week ahead, and indeed we believe several high-volatility strategies may outperform.
The US Dollar has shown early signs of a potential break higher across the board, and indeed we think that top-tier forex economic event risk may be enough to force the Dollar out of its range.
We can see traders positioning for big moves via FX volatility prices; the 1-week DailyFX Volatility Index has surged, while the longer-dated 1-month and 3-month measures have also hit multi-month peaks.
Forex Volatility Prices have Surged Ahead of a Critical Week for FX Markets
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
The shift in market conditions/expectations leaves our trading focus on two of our volatility-friendly automated trading strategies: Momentum2 and Breakout2.
Past performance is not indicative of future results, but the Momentum2 system has done well in key US Dollar pairs as of late and a pickup in volatility could likewise boost performance.
We have not traded Breakout2 for some time because of a lull in forex market volatility, but early signs of turnaround in market conditions suggest it could likewise outperform in AUD pairs in particular.
For other pairs we’ll stick to what has worked as of late, but a bigger move in vols would make us change our biases on other US Dollar pairs as well. Sign up for e-mail updates via my distribution list for any updates.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
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— Written by David Rodriguez, Quantitative Strategist for DailyFX.com