The US dollar index has now been range bound for the longest period in the last 28 years, and when that range is ultimately broken, it could signal a major shift toward heavy volatility and plentiful trade opportunities.
I had a conversation yesterday with a former boss and now good friend of mine who recently attended a meeting with some hedge fund giants. Included in that meeting was my personal favorite, Paul Tudor Jones.
My former boss said that one very interesting takeaway from the meeting was that many of the hedge fund giants agreed about the notion that today’s markets are very difficult compared to prior years.
Volatility, for short-term traders, is our best friend, afterall, and that got me thinking: How could the markets—specifically the currency markets—exhibit such low volatility during a debt crisis, which would be widely expected to produce more volatility?
The main reason is because major central banks have dropped interest rates in unison to rock-bottom levels, effectively creating very small interest rate differentials. At the same time, however, the central banks have been creating massive amounts of credit to purchase fixed-income assets in hopes of pinning rates at those artificially low levels. So far, the central banks have succeeded, and as a result, volatility has been severely suppressed.
However, the chart below suggests that volatility may not stay low for much longer.
Guest Commentary: Multi-Year Dollar Range Is on “Borrowed Time”
The US Dollar Index chart above dates all the way back to 1985. And, in those 28 years, there have been two major consolidation, low-volatility periods.
The first one was from June 1989 until January 1997, which calculates out to be 91 monthly bars, 390 weeks, or 2700 trading days. The second major consolidation over the last 28 years is actually happening right now. It formed just prior to the housing collapse and credit crisis in November 2005. And, if history is any guide to future market behavior—and we all know it is—the ongoing consolidation is currently on borrowed time.
Considering 91 monthly bars, 390 weeks, or 2700 trading days projected out from November 2005, it gives us equality of the ranges in late-May 2013. The current consolidation is now three months longer than the biggest currency market consolidation in 28 years.
Now, I have no idea what the catalyst will be that ejects us out of the current range, but that catalyst is coming soon, and when it does, expect volatility, ranges, and trading conditions to be plentiful.
By Todd Gordon of TradingAnalysis.com