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Pairs to Range Trade

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AUDNZD Range Holding As FX Market Vies For Direction

Thu, Feb 19 2009, 06:48 GMT
by John Kicklighter

DailyFX

The dollar is threatening the calm that range traders have been taking advantage of recently by forging breakouts against the euro and yen among other pairings. With the crosses ready to follow any momentum that develops behind these majors, a congestion setup in AUDNZD represents one of the few places where range conditions are supported both fundamentally and technically.

Why Would AUDNZD Hold a Range?

• Levels to Watch:
  -Range Top: 1.2750 (Range High)
  -Range Bottom: 1.2475 (Trend, Fibs)

• General congestion has started to give way to direction for many of the FX market’s more liquid active currencies. Should the dollar and euro-based shifts gain momentum, the action could easily spill over to the rest of the market and put any range setups in jeopardy. As always, AUDNZD can somewhat curtail this threat naturally through its composition of two high yielders with commodity links. Intensity of these external rallies is vital key.

• Taking a big-picture look at AUDNZD price action, we can see that the pair has been in a general advance since October. The most recent leg of this bias has developed on a rising trend that began with the Jan 16th low and has since produced a number of tests. However, a step down in congestion zones may point to a possible reversal pattern.

Suggested Strategy

• Long: Half-size entry orders will be placed at 1.2490 for an aggressive, but necessary start.

• Stop: Our initial stop will be set at 1.2390. This is wide enough to cover the former swing low. 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 1.2590 and the second at 1.2690 (for 200 bps).

Trading Tip – The dollar is threatening the calm that range traders have been taking advantage of recently by forging breakouts against the euro and yen among other pairings. With the crosses ready to follow any momentum that develops behind these majors, a congestion setup in AUDNZD represents one of the few places where range conditions are supported both fundamentally and technically. From here on out, the potential for trend development amongst the majors - that then spills into the crosses - could redefine general market conditions. AUDNZD can buffer interest rate, risk trends and imbalanced growth forecast considerations to a point; but an aggressive rally in any of the individual currencies can still work on this narrow range. Therefore, a good strategy is an important component of a successful range setup. For our suggested layout, we have first cut our position size in half to accommodate a wide stop that buffers the short-term rising trendline and last week’s swing low. At the same time, our wide stop requires somewhat aggressive objectives from an otherwise narrow range. We will cancel any open orders before Friday’s close or should spot hit 1.2610 before we hit our entry.

Event Risk Australia And New Zealand

Australia – The Australian dollar has struggled to forge any significant recovery from its multi-year lows; and fundamentals have done little to help the currency along. A lingering and vague driver for the Aussie dollar going forward, general risk trends are open to the whims of investor sentiment. In the past week, volatility behind these trends has risen as major efforts made by the US government to stabilize their economy and financial markets were pitted against dreadful, global growth numbers. The balance read in market price action could be stabilized by any number of unscheduled pieces of event risk. As for foreseeable obstacles, the Australian docket is holding a number of notable releases. Most prominent is Friday’s semi-annual parliamentary testimony by RBA Governor Glenn Stevens. His outlook for the economy and policy efforts could tell the market what the central banker will propose and enact to turn the economy around. Next week, a leading composite indicator, fourth quarter construction, fourth quarter capital expenditures and credit numbers for January will give a good mix for growth forecasts to benchmark on.

New Zealand – As the obligatory, high-yield currency, the New Zealand dollar will be dialed into risk trends. Though its Australian counterpart is itself sensitive to risk trends, the kiwi sees far greater consequence in its price action to shifts in market sentiment. Aside from the risk hurdles laid out above, the New Zealand docket may try to give a different fundamental nudge to price action. For the window set out for entry, there is little from the coffers that could stir a move. However, looking past the weekend, the data picks up. Monday’s credit spending numbers for January will provide a look into consumption and credit activity from the biggest component of GDP. Beyond that, the two year inflation outlook from the RBNZ will redefine rate forecasts – which have recently turned neutral.

Published on  Thu, Feb 19 2009, 06:55 GMT