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Forex pairs in this Article » EUR/USD, GBP/USD, USD/JPY
- Dollar and major forex counterparts likely to see very small trading ranges in holiday-shortened week- We’re shifting away from our sentiment-based trading strategies until the New Year- Key shift in US Federal Reserve dynamics promises much larger FX volatility in 2014

Short-term forex volatility prices have fallen to their lowest levels on the year, and indeed it seems likely that major currency pairs will remain quiet in the final days of 2013. Yet longer-dated volatility prices are actually significantly off of their lows. What does this mean?

Short-term Forex Volatility Prices are Near Yearly Lows

forex_trading_focus_shifts_to_the_New_Year_body_Picture_1.png, 2014 Promises Much Larger US Dollar Moves for this ReasonSource: OTC FX Options Prices from Bloomberg; DailyFX Calculations

The US Federal Reserve’s recent decision to begin the so-called “Taper” of Quantitative Easing policies was a game-changer: interest rate expectations have suddenly picked up and taken FX volatility with them. To put this into context we look at what kind of effect yields have had on FX market volatility through recent history:

Forex Volatility Expectations Heavily Correlated to Yields, Point to Big Moves Ahead

forex_trading_focus_shifts_to_the_New_Year_body_Picture_2.png, 2014 Promises Much Larger US Dollar Moves for this ReasonThe link between forex volatility prices and Eurodollar interest rate futures is now at its strongest in at least 5 years, and the fact that implied yields have broken higher suggests that that volatility can continue to rise. The Fed’s moves likewise have substantial implications on the Dollar:

US Dollar Stands to Rally Further Versus the Low-Yielding Japanese Yen

forex_trading_focus_shifts_to_the_New_Year_body_Picture_3.png, 2014 Promises Much Larger US Dollar Moves for this ReasonThe Greenback has rallied significantly versus the low-yielding Japanese Yen as the Bank of Japan keeps interest rates exceptionally low. The potential for further rises in US interest rates could send the USDJPY exchange rate to further peaks.

Stay tuned for more on the USDJPY as we publish our top trades for 2014 in the coming week. Spoiler alert: mine will revolve around the Dollar and Yen in particular.

In the meantime, we’ll stay flat on our strategy trading biases but look to trade opportunities in the New Year.

forex_trading_focus_shifts_to_the_New_Year_body_Picture_4.png, 2014 Promises Much Larger US Dollar Moves for this Reasonforex_trading_focus_shifts_to_the_New_Year_body_Picture_5.png, 2014 Promises Much Larger US Dollar Moves for this ReasonAutomate our SSI-based trading strategies via Mirror Trader free of charge

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