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Pairs to Range Trade

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EURCHF Range May Survive Policy Shocks and Building Event Risk

Wed, Feb 25 2009, 05:56 GMT
by John Kicklighter

DailyFX

A heady mix of fundamental and technical pressure is building up behind the currency market; and any range trades should come with limited notional risk and exposure to unstable economic forecasts. Backed by a strong range as well as close trade ties and mirrored policy approaches, EURCHF is well positioned to absorb most unforeseen shocks.

Why Would EURCHF Hold a Range?

• Levels to Watch:
  -Range Top: 1.5150 (Range High, Fib, SMA)
  -Range Bottom: 1.4750 (Trend, Pivot)

• Potential, event risk is very high for the euro. Considering the high level of uncertainty surrounding the ECB’s policy stance going forward, growth trends, the possibility of a region-wide and coordinate response to Euro Zone’s economic slump, and the threat of further sovereign downgrades imbues the euro with the quality of being one of the most highly speculative currencies. However, EURCHF is somewhat buffered as the Swiss often try to mirror the Euro Zone’s efforts.

• Congestion has been a dominant force for EURCHF for the past two months (like it has been for the rest of the currency market). Support is reasonably well defined with a notable pivot at 1.4750 and a rising trend only 35 points lowers. True resistance is a range high around 1.5150.

Suggested Strategy

• Long: Half-size entry orders will be placed at 1.4780 which is well above the trend.

• Stop: Our initial stop will be set at 1.4660. This covers the rising trend as well as the Feb 18 low. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (120) at 1.4900 and the second is 1.4950.

Trading Tip – A heady mix of fundamental and technical pressure is building up behind the currency market; and any range trades should come with limited notional risk and exposure to unstable economic forecasts. Backed by a strong range as well as close trade ties and mirrored policy approaches, EURCHF is well positioned to absorb most unforeseen shocks. For our suggested strategy, we have reduced position size and widened stops to allow for significant event risk on the economic docket that could push the market’s floor from the pivot, to the rising trend and then to the previous swing low. For targets, we set the standard first level equal to risk, while the second is set not much further – swapping outsized potential for a reasonable time frame and lower possibility of an untimely drawdown that cuts the second half off at breakeven. For those that are more risk tolerant, a trialed stop could be used on the second half and its target could be moved higher within the range or even beyond the range should they foresee a true trend change developing. There is substantial event risk on the docket, but there is enough cushion between current spot and support to weather these indicators. We will cancel any open orders by Friday or should spot hit 1.4975 before we are entered on the position.

Event Risk Euro Zone And Switzerland

Euro Zone – Just a few weeks ago, Greece, Italy and Spain received downgrades to their sovereign debt. Then last week, ratings agencies warned that banks in Eastern European countries were at risk of being downgraded. These strains in the financial system follow the tumble in growth; and unless they are answered in a coordinated response, conditions could become much worse. Taking the initiative, European leaders convened and vowed to come up with a policy initiative that was aimed at the region rather than just the individual member economies. The details or true scope of this plan are still up in the air; but it is a factor that no doubt carries the potential to dramatically alter the course of the euro. As for the more mundane scheduled event risk, there are plenty of indicators that could drive short-term volatility and alter growth and interest rate expectations. The second round reading on GDP figures from German and the Euro Zone will offer much-needed insight into the trends behind the various sectors that will guide speculation for activity through the first quarter and beyond. Other various readings will give a timelier look into activity including German consumer confidence, employment and Euro Zone retail sales. Inflation data still has its place as well as the ECB’s stance has been questioned.

Switzerland – The Swiss franc is a well-known safe haven for the world’s financiers; but this title has put the currency under the close scrutiny of European politicians who say the availability of the tax shelter is exacerbating economic and financial difficulties. If regulations and sanctions come out of this blame, it could fundamentally change the Swissie’s place in the FX market – and currency traders know it. For economic data, there are only a few readings scheduled for release; but they are all notable. The KOF and SVME PMI numbers are notable growth figures; but they can’t trump the 4Q GDP reading due next Tuesday for clout.

Published on  Wed, Feb 25 2009, 06:02 GMT