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Pairs to Range Trade

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GBPCHF A Riskier Range Alternative To Its Euro Counterpart

Thu, Feb 26 2009, 06:05 GMT
by John Kicklighter

DailyFX

High volatility and event risk is naturally something to avoid when looking for range trades; so our interest in GBPCHF is aggressive. However, a sound strategy is still necessary to make this a reasonable position with acceptable risks rather than just a gamble.

Why Would GBPCHF Hold a Range?

• Levels to Watch:
  -Range Top: 1.7500 (Pivot, SMA, Fib)
  -Range Bottom: 1.6525 (Fibs, Trend, Range Low)

• The correlation between GBPCHF and general risk trends has faded with time. With interest rates from both quickly approaching zero and recession a common factor, the lines between risky and less risky is blurred. What’s more, we have seen the franc’s position as a long-term safe haven through its banking system come under scrutiny with the EU threatening sanctions on international tax havens. On the other hand, scheduled event risk is quite substantial for a pair that is highly volatile.

• Congestion has been a common state for GBPCHF for a couple months, but this pair’s chop is still highly volatile and prone to short bursts of clear direction. Support is our immediate concern. There is a confluence of technicals in this area including trendlines and various Fibs.

Suggested Strategy

• Long: Entry on reduced sized orders will be placed at 1.6575 which is very close to support.

• Stop: Our initial stop will be set at 1.6415. This will cover the low of the recent downswing. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (160) at 1.6735 and the second is 1.6895.

Trading Tip – High volatility and event risk is naturally something to avoid when looking for range trades; so our interest in GBPCHF is aggressive. However, a sound strategy is still necessary to make this a reasonable position with acceptable risks rather than just a gamble. First and foremost, it is important to highlight that this position is highly correlated to yesterday’s EURCHF setup. Therefore, one or the other should be avoided to ensure that there is not double the risk. Comparing this pair’s range setup to its euro counterpart’s: volatility is much higher, scheduled event risk is deeper and GBPCHF’s sensitivity to risk trends can make it a breakout risk should global interests change. To buffer these issues, we will reduce our positions size to at least half normal to ensure that the notional value of a loss will be limited. From the actual setup itself, we have put in for an aggressive entry that is still reasonable given the repeated tests of the range low. The stop covers the recent swing low with wide enough room for a significant tail. At the same time are targets are set within the range of the past week rather than the past month – making it much more likely to book profit and quickly. To further reduce risk, we will close all open orders by Friday or should spot hit 1.7050 before we are entered.

Event Risk UK And Switzerland

UK – Speculators always look to the future when valuing currencies; but there is a point when sentiment goes awry of fundamentals. The pound may have reached that point over the past few months. The sterling was pushed to multi-year and record lows against it counterparts as the fundamentally inclined realized the UK economy was on pace to see the worst economic slump among its industrialized peers. This would be a dramatic departure from the high-yield, high-growth days of only two years ago. However, there is a point of equilibrium where the British slump is priced in and growth from the other side of the pair starts to have its impact on the spot rate. The IMF has already pegged the UK as the likely worst performer of 2009, but we have seen Japan and US forecasts come under further pressure recently. Going forward, each sector of the UK economy will be closely monitored for the intensity of ifs slump. The consumer will be of utmost importance. Lending figures and sentiment reports will offer insight into their consumption capabilities. Also important will be business and housing sector data. However, with the BoE decision also due next week, interest may be restrained.

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  Thu, Feb 26 2009, 06:15 GMT