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Pairs to Range Trade

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Volatility And Event Risk Produce A Quick GBPJPY Range Setup

Thu, Nov 6 2008, 06:30 GMT
by John Kicklighter

DailyFX

Even under normal circumstances, GBPJPY is an extremely volatile pair – and market conditions are still far from normal. Therefore, a short-term range opportunity for this pair must be played precisely to be pulled off.

Why Would GBPJPY Stay in a Range?

• Levels to Watch:
  -Range Top: 160.85 (Trend, Fib, SMA)
  -Range Bottom: 155.25 (Fib, Trend)
  

• Congestion seems to be a common theme across the market recently; but the short-term ranges nesting at the ends of major trends carries a substantial risk of breakout. Aligning ourselves to the larger trend in the market and in sync with the speculated outcome of the forthcoming event risk, we can set up a reasonable short-side range setup for GBPJPY as long as our strategy is sound and takes the timing of key indicator releases into account.

• Technicals are modest for the volatile GBPJPY. A short-term pennant formation is developing within a dominant bear trend. Resistance (our primary focus) is called up on a falling trend of high from last week and a notable Fib retracement that has also acted as a pivot. Support similarly has a trend and Fib.

Suggested Strategy

• Short: Entry orders will be set at 160.50 which may be aggressive for the short-term trend.

• Stop: The initial stop will be set beyond the falling trendline at 161.50. To protect profit, we will move the stop on the second lot to breakeven when the first target is hit.

• Target: The first objective equals risk (100) at 159.50. The second target will be 158.00.

Trading Tip – Even under normal circumstances, GBPJPY is an extremely volatile pair – and market conditions are still far from normal.Therefore, a short-term range opportunity for this pair must be playedprecisely to be pulled off. However, if the strategy and market unfoldcorrectly, there may be a chance for a quickly-played and high-yieldingsetup. The strategy we are looking is good for a very short time frame;but could offer two potential scenarios for a setup. Everything willrevolve around tomorrow’s top event risk – the BoE rate decision. Ifthe pair bounces back up to the entry level before the announcementcrosses the wires, it could provide the necessary momentum for a quicksell off. Our tight stop will ensure we are not caught in a lagerbreakout. Should we be far from entry, then the pair could easilybounce on a better than expected outcome and trigger our position. Wewill cancel all orders by Thursday’s close or should GBJPY break belowthe rising trend at 154. Also, since our suggested stop is somewhatwide at 100 points per lot, we will reduce our position size to reduceour risk.

Event Risk UK And Japan

UK – The Bank of England’s rate decision couldeasily be a major market moving economic event for the British pound.
Considering how divergent the consensus between economists and tradersis on the potential outcome, as well as the implications for theoutlook for interest rates and growth in this event, there will be alot of pressure and a relatively sensitive response to level ofsurprise. Heading into the event, the economist consensus provided byBloomberg is calling for a 50bps cut to 4.00 percent; but overnightindex swaps suggest the move is more likely to be 75bps. What’s more,the statement that usually accompanies a shift in policy could redefineexpectations for the pace of rate cuts going forward. Looking at therest of the economic docket for the coming week, there is no majorrelease scheduled until after the weekend – outside of our tradeperiod. 

Japan – Event risk from Japan has long had littleeffect on the yen; but the BoJ’s willingness to change the nation’sbenchmark rate and the intensified focus on the local recession maydraw more interest to the docket this week. What’s more, with a pair asvolatile as GBPJPY, events can be amplified. Through our limited periodfor a potential trade, there is only one noteworthy indicator crossingthe wires – the leading indicators index. As gauge for expansion overthe following three months after the measure period, this may drawmodest interest from fundamental traders. Otherwise, general risktrends will guide the yen (and more broadly this risk-sensitive pair).Ironically, should equities markets be encouraged by the ECB and BoE rate decision, we may still see GBPJPY rise on a rebound in risk appetite.

Published on  Thu, Nov 6 2008, 06:38 GMT