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Pairs to Range Trade

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Looking For Short Opportunities In The GBPJPY Range

Fri, Nov 21 2008, 07:06 GMT
by John Kicklighter

DailyFX

It is a dangerous proposition to range trade one of the currency market’s most volatile pairs; but technical patterns and risk/reward is so clear for GBPJPY that a good setup (with risk included) can be established.

Why Would GBPJPY Stay in a Range?

• Levels to Watch:
  -Range Top: 146.50 (Trend, Fibs, SMA)
  -Range Bottom: 139.00 (Triple Bottom)

• Volatility is a staple of the popular GBPJPY. However, ranges do exist for this pair when broad risk trends settle. Considering market activity across the currency market, it is clear that there is considerable interest keeping even the most liquid pair anchored. This has been seen most clearly in today’s USDJPY reversal and yesterday’s EURUSD pullback. This is likely a sign of uncertainty in the market over forecasts over growth and returns.

• Technicals are surprisingly clear for this pair. Support is derived on a major triple (quadruple if today’s low holds) bottom at 139. However, considering the general bear trend that has subsisted over the past three months, this level is certainly a target. Resistance is a trendline, Fib confluence and 50-bar SMA around 146.50.

Suggested Strategy

• Short: Entry orders will be set at 145.90 at half the normal position size.

• Stop: An initial stop at 146.90 does not account for the recent spike high, but covers the trend. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (100) at 144.90. The second target will be 142.75.

Trading Tip – It is a dangerous proposition to range trade one of the currency market’s most volatile pairs; but technical patterns and risk/reward is so clear for GBPJPY that a good setup (with risk included) can be established. First of all, it is important to recognize that the suggested strategy is for a short position. Support is very concise; but spike lows are difficult to enter on and a bearish dominant trend suggest the steady decline into 139 could end with a major breakout. It would take a considerable reversal to hit our entry, and the moving target may mean we miss the next bearish reversal in the area. However, it is absolutely necessary to maintain a reasonable risk/reward that also holds a good stop. To further reduce risk, it is important to reduce position size (we will take half our normal size) so as not to incur a larger than average loss. Finally, to avoid volatility going into the weekend; we will cancel all open orders by Friday’s close or if a daily bar closes below 139.

Event Risk UK And Japan

UK – Over the past 12 hours the British pound has been under significant pressure; but not because of any specific scheduled event risk. Instead, the outlook for the UK economy and its benchmark lending rate has been the primary driver of the single currency’s sharp decline. Though speculation has no doubt priced in a significant drop in growth over time and a steady pace of monetary policy easing; recent data and the MPC’s willingness to cut the benchmark by 150 bps has certainly not been fully taken account of. This fundamental burden will no doubt linger for weeks and months ahead. And, whenever risk aversion rises, the vulnerable pound will likely respond with a leveraged response. Outside of this vague threat, the economic docket will offer a few road bumps to range conditions. BBA home loans for October will measure the health of the housing and - more importantly - the consumer sectors. The second reading of GDP will only incite action should it offer a significant reversion and therefore surprise. Consumer confidence is a key reading considering the failing health of the economy.

Japan – It’s usually the case that Japanese event risk is not a significant driver for price action in the yen crosses, though this may not be the rule for long. First and foremost, the Japanese yen will stand as the key risk-aversion currency. If equities continue to breakdown, carry is unwound and credit costs push fresh records; the Japanese yen will be the primary beneficiary among the G10. Outside of this market theme though, a few events and releases will have their place as well. The BoJ rate decision due tonight has the potential to offer suprises considering the policy group’s rate cut at their last meeting. Later next week, the round of production, consumer and inflation data will give a good measure on the balance between growth and inflation for monetary policy scope ahead.

Published on  Fri, Nov 21 2008, 07:10 GMT