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Pairs to Range Trade

A Wide Trading Zone And Fundamental Buffer Secure A EURCHF Range

Fri, Feb 6 2009, 05:40 GMT
by John Kicklighter

DailyFX  |  View company's profile

With the pound and yen crosses both winning significant breakouts (even if much of the initial surge has been retraced) and many of the majors positioned for something similar on tomorrow’s NFPs, conditions are generally unfavorable for range trading. However, with a fundamentally-buffered EURCHF comfortably positioned in the middle of its own congestion band, a range may be a good setup.

Why Would EURCHF Hold a Range?

•   Levels to Watch:
  -Range Top: 1.5175 (Pivot, SMAs)
  -Range Bottom: 1.4825 (Trend, Fib)

• The ECB rate decision has come and gone without a major break from EURCHF. While this event itself would end up as a dud for a market mover, this pair is nonetheless buffered from most significant pieces of scheduled event risk. As major trade partners whose interest rate policies tend to track each other, there is rarely an economic shock that can drive a significant break. Surges in general risk trends, on the other hand, is a different story

• Technically, the EURCHF range is somewhat lacking in well-defined boundaries. This is a problem should momentum or volatility develop when spot is hovering near one of the range limits. Support is seen in a confluence of a swing low, trend and Fib all around 1.4825/55. Our interest though lies with the far more obvious 1.5175/200 pivot.

Suggested Strategy

• Short: Half-sized entry orders will be placed at 1.5140 – well below the late January swing high.

• Stop: An initial stop at 1.5240 covers the range with enough room for a modest false breakout. 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 1.5040. The second objective is 1.4940.

Trading Tip – With the pound and yen crosses both winning significant breakouts (even if much of the initial surge has been retraced) and many of the majors positioned for something similar on tomorrow’s NFPs, conditions are generally unfavorable for range trading. However, with a fundamentally-buffered EURCHF comfortably positioned in the middle of its own congestion band, a range may be a good setup. The fact that this pair is in the middle of its congestion band (between 1.5200 and 1.4800) means that any sudden shocks to risk appetite (the true driver for price action behind this pair) will be spent in moving spot closer to the range boundaries. Considering there is only one full trading session left and considerable room to cover before the market reaches the range boundaries, this may be a setup that isn’t triggered into the first half of next week. As such, we will cancel any lingering, open orders by Wednesday. Alternatively, a confirmed reversal from support could offer an equally attractive setup within the same time frame.

Event Risk Euro Zone And Switzerland

Euro Zone – The potential for volatility in Euro-Zone event risk may have peaked this week with the passing of the ECB’s rate decision, but there is plenty of data scheduled for release over the coming week to keep the market busy. To finish out the rest of this week, the German physical trade report will take a unique reading for growth and exchange rates. Ultimately though, its leverage on price action is minor – especially with the weekend bearing down on liquidity. After the weekend, there is a lull until Thursday when the ECB releases its monthly report for February. Expectations will be reserved though as central bank president Trichet likely covered most of the report’s findings in his address to the public after the rate decision. Top scheduled, event risk comes on Friday with the first reading of fourth quarter GDP for the Euro Zone and Germany. So far we have seen the UK’s number come relatively in line while the US crossed the wires better than expected. Until recently, optimism surrounding the European economy and its yield potential were holding up pretty well. Should this data disappoint their already low forecasts, it could seriously undermine the euro’s fundamental strength.

Switzerland – Scheduled economic data and general risk trends both present the threat of volatility for the Swiss franc. From the docket, Friday’s unemployment report will act as a general – but lagging – gauge of health for the small economy. With the economy just starting to tip into its own recession, a jump in the jobless rate will certainly lower expectations on the expected bottom to the developing recession. After the weekend, there will be two indicators: one for inflation and the other for consumer spending. Both will likely be burdens for the Swiss benchmark lending rate and the SNB’s next meeting in March, but their volatility is likely limited. The true driver for price will be swells in general risk. This Friday’s US NFPs or next Friday’s European GDP may catalyze the move, but a true shift in sentiment needs to truly get the market moving.

Published on  Fri, Feb 6 2009, 05:45 GMT

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