The DXY Dollar Index had the biggest single-day loss in nearly three months last Friday as the benchmark currency once again proved why it is such a popular choice for CFD traders regarding forex markets. The index started the week relatively quietly, but volatility increased noticeably on Thursday and Friday.
This is exactly the kind of activity that draws CFD traders to currency markets, as swift movements combined with plentiful data for analysis offers the perfect scenario for making decisions about taking a position.
Dollar week
With an initial rally, the DXY cleared a short-term resistance level that had been set back in mid-December, but it did not follow through in any meaningful way. Subsequently, Friday saw the dollar’s biggest single-day drop since 1st November. The fall saw it lose around 0.8% of its value and is among the sharpest losses over the past few years.
Of course, periods of unusual quiet such as those that have taken place recently always normalise at some point, in the same way that times of excessive movements will eventually settle down. Anyone observing last week’s action will have seen this at work. Charts clearly show that there is a ratio of volatility over a short period that is relative to a longer time frame. An example is the ratio for the five-day and the 20-day average true range (ATR), i.e. one trading week and one trading month.
A drop in this ratio suggests that activity levels are slowing down in relation to previous movements, and in this case, the fall of the ratio to the lowest level since December 2016 is clearly indicative of a quite remarkable downturn. The activity during the second half of the past week took some of the sting out of the situation, but the trend-oriented form is still proving elusive.
The figures clearly point towards volatility that means higher levels of uncertainty and risk, and while many investors might find this a worrying scenario, for CFD traders, it is exactly the kind of environment that will hold great appeal.
USD pairs
The Brexit saga continues to exert influence on the GBP/USD forex pair, as there was a certain bullish tinge over the past week, largely down to the pound. The pair cleared trendline resistance when it broke above 1.3000, and after Friday, Cable’s 200-day moving average showed at 1.3070.
Other major pairs, including NZD/USD, USD/CAD and USD/CHF, all saw volatile trading. but whether this is enough to leverage the dollar to a trend that could be self-generating and systemic is still open to debate.
Forex and CFDs
When markets are volatile, this means that there are plenty of opportunities to take a position using CFDs. Forex markets are volatile on a day-to-day basis but remain open to analysis from charting over much longer periods. When short-term value changes mean that holding positions over smaller lengths of time can reap rewards, CFD traders start to take an interest. The past week’s activity on the DXY alone is a perfect example of how forex markets can hold such great appeal for CFD trades.
Leverage is also a factor that comes into play, as by definition, buying forex assets really does cost money, and much higher volumes are accessible to CFD traders who understand both the advantages and possible pitfalls of using a leveraged product. In fact, CFD brokers will frequently offer greater leverage for forex trades than stock trades or those based on other underlying assets.
Transactions
Forex markets involve very large volumes of transactions, and recent estimates suggest that this can account for trading as much as $4tn on an average day. Away from the influence of many market forces that might apply to stock exchanges or commodity dealings, currency exchange markets offer a level playing field to smaller investors, which is another reason why so many individual CFD traders find themselves drawn to them
The popularity of cryptocurrencies among CFD trades is yet another factor that holds an appeal for CFD investors in terms of forex. As crypto is still a relatively new trading tool, it is no surprise that those who favour CFDs are also interested in cutting-edge blockchain tech and the new digital tokens that seem to arrive daily.
DXY moves
The US Dollar Index, usually known as DXY but sometimes called USDX or simply DX, actually began back in March 1973. As a measure of the value of the US dollar, traders of all kinds use it to figure out where the strength of the greenback is at any given time and to try to extrapolate data to show in which direction it might move.
The makeup of the “basket” of foreign currencies that the index uses to relate to the dollar has only changed once, when the EU introduced the euro in 1999. Some observers now say that a revision is overdue, as the currencies of countries such as China and other major international trading nations do not have representation.
In any case, as it currently stands, the DXY provides essential daily information for CFD traders, and the fact that last week saw it suffer its worst one-day fall since early November can only be significant.