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Pairs to Range Trade

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Clear Wedge Boundaries And Balanced Fundamentals Set Up EURCHF Range

Wed, Nov 19 2008, 05:45 GMT
by John Kicklighter

DailyFX

Strong, contrasting technical and fundamental trends have kept EURCHF range bound and are likely to keep price action contained for some time to come.

Why Would EURCHF Stay in a Range?

• Levels to Watch:
  -Range Top: 1.5225 (Trend, Fib)
  -Range Bottom: 0.6350 (Pivot, Fib)

• Violent swings in risk appetite trends have been tempered over the past few weeks; but volatility and fundamental disparity are still incredibly high for the currency market. Currently, congestion is dominating price action as speculators weigh the more pressing economic driver behind the broader trend in the market: risk aversion or growth. The threat of another spike in risk aversion favors the franc, but their economies are closely tied.

• EURCHF is in a state of flux. The dominant trend still holds with the three month bear trend. At the same time, the correction since late October has been significant and developed into a clear ascending wedge. Resistance is now the line in the sand with a notable 50% fib and the wedge ceiling standing around 1.5210/25.

Suggested Strategy

• Short: Entry orders will be set at 1.5195 – below recent highs and the range of resistance.

• Stop: An initial stop at 1.5225 won’t survive a volatile false break, but is above recent highs. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (70) at 1.5125. The second target will be 1.5025.

Trading Tip – Strong, contrasting technical and fundamental trends have kept EURCHF range bound and are likely to keep price action contained for some time to come. Recently, this and other risk-sensitive currency pairs have worked themselves into constricting ranges – raising the potential for breakout – but developing price action and economic forecasts present a different outlook for EURCHF. From a fundamental standpoint, the Swiss franc is known as a safe haven currency to the euro’s high-risk designation; but speculation has turned the tables with forecasts for heavy rate cuts from the ECB going forward. What’s more, the growth outlook is taking a greater precedence to currency direction than interest rates and both economies are known to be inextricably linked. Through the short-term, the technical setup is most encouraging. While this pair is carving a reversal wedge, it is a congestion band with a lot of room to work with – making it good for perhaps another few swings. Our suggested strategy looks for a stop that will not incur too big a loss should a break occur while also holding achievable price targets. To further reduce risk, we will cancel all open orders by Thursday or should spot hit 1.50 first.

Event Risk Euro Zone And Switzerland

Euro Zone – Scheduled event risk from the euro is relatively light for the remainder of the week and certainly within our window for holding orders open. In fact, the first round of significant event risk doesn’t cross the wires until Friday (we will close open orders by Thursday). Euro Zone and regional indicators of business activity from purchasing mangers through the month of November will give an update for traders to speculate the level of growth through the final quarter of the year. Not surprising, expectations are bleak as domestic and foreign consumption trends fade along with employment and asset values. For open positions, next week’s calendar picks up with a round of high-level German readings. Readings for business sentiment, consumer confidence and inflation will keep the market busy with speculating interest rate and growth trends.

Switzerland – It is well known, that Swiss data often has little influence on franc price action. The primary interest in the currency comes from its safe haven status (especially when it is denominated against a risk-sensitive currency like the euro).
However, there are few foreseeable events that are expected to redefine risk trends over the coming week. These events will come out of the blue. On the other hand, the economic docket should not be ignored. As the fog of recession begins to settle over the global economy, there will be a greater interest in what economy is best positioned to survive the crunch with the least damage and could potentially be the first to rebound. With readings of consumption and trade trends on deck, this side of the fundamental market will be exercised.

Published on  Wed, Nov 19 2008, 05:50 GMT