A rarely known index is sending shockwaves through professional currency trading desks all around the world. The JP Morgan Global FX Volatility Index is now warning of an imminent explosion in the US dollar.
Over the past 25 years, there have only been three troughs in the index and each time the US dollar exploded 10%. The volatility index is now trading at the lowest in five years, making a new fourth trough.
In this article, we explore the possible scenarios for what could be a record move in the US dollar and how traders could potentially take advantage of it. Let's get started!
Why has JP Morgan's FX Volatility Index Spooked the Market?
The Forex volatility index developed by JP Morgan is fairly simple. Its aim is to measure the volatility of Forex options across a basket of major and emerging currencies. Currently, it sits at a five-year low which means the volatility of currency markets is historically quite low.
Even a similar index tracked by Deutsche Bank is sitting at its lowest level in five years. Low interest rates across the world has ramped up demand for equities which has helped lift global stock markets higher but push down currency market volatility. So why is this important?
According to data compiled by Bloomberg, each time the JP Morgan Global FX Volatility Index has been trading close to where it is now, the US dollar (specifically the US Dollar Index Futures Contract), has exploded around 10% over the next six months. However, this is simply a measure of volatility - not direction!
In fact, in 1996 the US dollar surged more than ten per cent, while in 2014 the dollar rose more than 15%. However, the volatility slump in 2007 helped the dollar to drop more than 10%. The key question is what is influencing the US dollar right now? Let's take a look.
The Major Influences on the US Dollar Right Now
One of the biggest influences on the US dollar right now is a change in US Federal Reserve monetary policy. Early this year the Fed spooked the market by shelving plans to raise interest rates this year. The Fed has been the only major central bank to have been increasing interest rates which helped lift the US dollar while pushing down other major currencies like the Euro and Australian dollar.
Another major influence affecting the US dollar is the extreme positioning in the EURUSD currency pair. According to the latest data from the Commodity Futures Trading Commission, short bets on the euro now stand at their highest level since December 2015. While some would take this as a bullish sign for the US dollar and bearish sign for the euro - extreme short positioning in any market is more susceptible to huge price swings to the upside on any positive news announcement.
There is also the uncertainty surrounding US and China trade talks. While Trump has been talking up the progress made in talks, at the beginning of May he reversed his position saying they are still far apart and that negotiations are taking too slow. The market experienced a huge amount of volatility on this announcement.
Currently, the fundamental picture is mixed with both bullish and bearish cases for the US dollar. What do the technical charts say? Let's find out.
How to Trade US Dollar Volatility
One of the currency pairs that is most widely impacted by movements in the US dollar is the EURUSD. This is because these are two of the largest currencies in the world. The long-term chart of the currency pair is also painting an interesting picture for traders:
Source: Admiral Markets MT5 Supreme Edition, EURUSD, Monthly - Data range: from October 1, 1984, to May 6, 2019, accessed on May 6, 2019, at 10:57 pm BST. - Please note: Past performance is not a reliable indicator of future results.
In the screenshot above, it is clear to see the monthly chart of the EURUSD has been held in between two long-term support and resistance levels, denoted by the horizontal support line and descending resistance line, both in black. Currently, price is trading in the middle of the support and resistance levels.
Historically, the market has bounced off these levels so most traders will be looking to trade as the historical price pattern suggests. However, there is a risk that the market could break out of these levels at some point, potentially causing a much bigger move if the JP Morgan Global FX Volatility Index is correct.
While both situations are focused on the long-term, some traders will view lower time frame charts to look for early clues on where the market could go. In any situation, using the exclusive Admiral Markets volatility protection settings could prove to be very useful and can be activated in Trader's Room for Admiral.Markets, Admiral.Prime and Admiral.MT5 accounts, either live or demo.
With the potential of imminent record-breaking moves, how are you preparing to take advantage?
One of the best ways you can get started is by downloading the MetaTrader 5 trading platform, where you can trade thousands of the world's financial markets using your Admiral Markets live or demo account. Simply click below to get started!
The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:
- The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation.
- Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
- Each of the Analysis is prepared by an independent analyst (Jitan Solanki, Freelance Contributor) based on personal estimations.
- To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
- Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
- The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
- Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
- The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
- Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.