US Dollar Implications as Volatility Registers Multiyear Lows

You may have heard ‘complacency’ thrown around recently with respect to the current low volatility environment. The next 4 charts highlight this phenomenon. Capital markets underwent a major shift in volatility in 2007 and 2008. Simply, market volatility (uncertainty) increased and registered extreme levels in October 2008. Volatility has reverted to 2007-2008 levels. Is this another shift? Are we in for an extended period of low volatility or does this decline in volatility serve to correct a ‘bull market in volatility (uncertainty)’ before the next wave of high volatility? Viewed in the context of price pattern and other technical considerations such as momentum and sentiment, markets are on the cusp on an explosion in volatility. The implications are USD bullish and ‘risk’ bearish but trades must be structured with risk as the primary consideration. Conviction in an idea might be high but what could happen doesn’t mean it will happen.

How to Read These Charts:

-Black lines are plots of weekly close for the specific currency pair

-Green lines are 1 week volatility

-Blue lines are 1 month volatility

-Dark Red lines are 3 month volatility

-Red lines are 1 year volatility

-Red dots indicate that that week’s volatility was equal to or lower than this week’s volatility AND that this week’s volatility was the lowest so far this year

EURUSD

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_eurusd.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

GBPUSD

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_gbpusd.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

AUDUSD

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_audusd.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

NZDUSD

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_nzdusd.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

US Dollar Index (ICE) Continuous Contract Weekly

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_usd.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

I’m still following the 1995/96 USD model. “IF the current market follows the 1995/96 model then expect weakness into mid-August below 8139. 8082 is former resistance and now potential support. The 1995/96 market endured a deep retracement (in late July and early August of 1996) that nearly touched the previous swing low (February 1996 low). If that happens this time around, then weakness would extend below 80 but a bottom would form before the February low of 7899.” The final swing low in 1996 occurred 337 days after the start of the 1995 low. 337 from the 2011 low is August 22nd and just 7 trading days from today. Expect dire prognostications regarding the US dollar in the mainstream media just before it embarks on one of its greatest bull runs of all time.

US Dollar Index (ICE) Continuous Contract Daily

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_usd_1.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

“The relationship between the US Dollar Index in 1995-1996 and now was pointed out to me by ElliottWave-Forecast. The charts tell the story and it’s uncanny. Not only do the patterns show remarkable similarity in form, but also in time and amplitude. The first number denotes the number of days that the specific leg consumed. The second number in parentheses denotes the number of days since the start of the pattern. The numbers with decimal points are percentage and measure the change from low to high of each leg in the pattern with the number after the slash measuring the net change from the start of the pattern. If the pattern continues (and there is no guarantee that it will of course), then the USD would trade sideways to down throughout July and August before bottoming just above the March low. This should be interesting to follow.” I am treating this week’s low as a pivot. As long as price is above 82.06, evidence warrants a bullish stance. A drop below would delay and shift focus to the June low at 81.39.

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_usd_2.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR)

Weekly

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_usdollar.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

Jamie – The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is at support from the trendline that extends off of the 2012 lows. Still, a deeper decline into mid-August (as per the 1995/96 model) is possible and could reach the 100% extension of the decline from the June high at 9940. The 52 week average may come into play as well (currently just above 9900). With these figures in mind, the index is probably no more than .7% or so from a swing low and one might already be in place. Exceeding the 8/2 high would increase confidence that a low is in place. It was mentioned last week that “In the current environment, it would only be appropriate for price to trade below Thursday’s large range day and convince the world that the trend is down before staging an impressive bullish reversal.” The lows were probed 3 days this week but price held up so far.

Euro / US Dollar

Daily

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_eurusd_1.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

Jamie – Viewed in the context of the wave principle, the low volatility figures in the EURUSD may have marked the end of a 3 wave correction. A triangle or flat is still possible in which case price will trade sideways before registering new lows. Additional bearish evidence includes price reaching its 2nd standard deviation from the 20 day moving average on Monday (which has produced a top every time since February), price reaching its 60 day (roughly 3 months) moving average for the first time since early May and daily RSI failing at levels consistent with bearish resumption. The weight of evidence remains bearish. 12340/65 is resistance. A drop below 12040 would put the 2010 low at 11875 in focus.

British Pound / US Dollar

Weekly

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_gbpusd_1.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

Jamie15800 and 15900 remain levels of interest but I want bring attention to another possibility. That is, wave 2 may be complete with a possible truncation. The implications would be for a sharp decline from below 15777. It makes sense to keep this count handy given bearish implications from the EURUSD pattern (3 waves up, even if part of a larger correction).

Australian Dollar / US Dollar

Weekly

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_audusd_1.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

Jamie Forget about the wave count for a moment and focus on this week’s action. In fact, price has traded at the same levels for the last 7 days. The point is that the 10600 area is clearly well defended. The swings since the 2011 high compose a triangle. The NZDUSD pattern makes it more likely though that the triangle is not bullish but rather forming from the October 2011 low as wave B within an A-B-C decline from the 2011 high. A top may be in place but exceeding the high would shift focus towards trendline resistance just shy of 10700 (11680 next week). The next leg of the triangle should bring price back below parity.

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New Zealand Dollar / US Dollar

Weekly

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_nzdusd_1.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

Jamie Bigger picture, the NZDUSD rally from the June 1 low is probably wave c within a triangle from the November low (B wave triangle). A drop below 8067 would increase confidence that a top is in place and that the next leg of the triangle is underway towards 7700. Look lower towards 8070 and 8030 near term. These levels may produce a short term bounce if reached but a drop below 8070 would also increase confidence that an important top is in place.

US Dollar / Japanese Yen

Daily

US_Dollar_Implications_as_Volatility_Registers_Multiyear_Lows_body_usdjpy.png, US Dollar Implications as Volatility Registers Multiyear Lows

Prepared by Jamie Saettele, CMT

JamieThe USDJPY formed a key reversal last Wednesday, which happens to also be the first day of the month. This is a powerful combination. It would be much more bullish without the specter of 3 waves up from 7765, which is bearish. Also, this week’s dreadful range and inability to extend upon the reversal leaves me suspicious regarding upside potential. 3 wave rallies at multiple degrees of trend highlight that the larger trend is probably still down.

--- Written by Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com

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Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    0.9331-0.0001-0.01%
    AUDUSD=X
    0.5551-0.0004-0.07%
    AUDGBP=X
    0.6750-0.0005-0.07%
    AUDEUR=X
  • Commodities
    Commodities
    NamePriceChange% Chg