ABN Amro has launched a foreign exchange model that indicates whether the EUR-USD exchange rate is likely to trend higher or lower, or instead is subject to movements within a trading range. The ABN Amro FX Regime Prediction Indicator assesses market volatility and positioning to assign a probability factor to likely movements in the EUR-USD spot rate in the coming week. Typically, currency managers use one of two strategies: ‘trend following’, which takes positions on long-term trends; and ‘volatility capture’, which uses option positions to sell volatility between trends. According to ABN Amro, adopting a single strategy can cause losses: a market that is range trading undermines maintained long or short positions, while short volatility positions fail to take advantage of trending movements in the spot rate. ABN Amro believes that by following the FX Regime Prediction Indicator, currency managers can confidently employ a switching strategy, using ‘trend following’ when the probability is high that EUR-USD is trending up or down, and ‘volatility capture’ when the probability is high that the EUR-USD exchange rate is simply range trading.
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