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Pairs to Range Trade

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AUDCHF The Best Range Candidate Among Congestion Bound Australian Dollar Crosses

Fri, Mar 6 2009, 05:48 GMT
by John Kicklighter

DailyFX

Despite the top tier event risk that crossed the wires earlier this week, the Aussie dollar crosses have not ventured beyond the boundaries of their broad ranges. AUDCHF shares many of the appealing traits of its cross compatriots; but an active congestion band and fundamental edge make this perhaps the best candidate for a range setup.

Why Would AUDCHF Hold a Range?

• Levels to Watch:
  -Range Top: 0.7650 (Fib, SMA, Range)
  -Range Bottom: 0.7400 (Fibs, Trend)

• The Australian docket has already dropped most of its major event risk for the week – leaving AUDCHF to the bigger themes in the currency market to drive price action. For fundamental drivers, this pair is unusual. There is still a notable safe haven quality in the yield differential; but a focus on growth trends alters this quality. Recently, the RBA held its benchmark lending rate, spurring speculation that economic activity will rebound soon. In contrast, the cracks in the European region are growing.

• AUDCHF is carving a congestion pattern within a broader congestion pattern. This pair has established a wide and gradual ascending wedge pattern since early October. Recently, the rising trend in this formation has confirmed support on tighter congestion with Fibs at 0.7400.

Suggested Strategy

• Long: Entry orders will be placed at 0.7430 which is reasonable with the rising floor.

• Stop: Our initial stop will be set at 0.7350, which covers the rising trend and volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (80) at 0.7510 and the second is set to 0.7590.

Trading Tip – Despite the top tier event risk that crossed the wires earlier this week, the Aussie dollar crosses have not ventured beyond the boundaries of their broad ranges. AUDCHF shares many of the appealing traits of its cross compatriots; but an active congestion band and fundamental edge make this perhaps the best candidate for a range setup. From a fundamental perspective, there is little scheduled event risk that could directly drive this pair any time soon. For the more traditional risk appetite correlation, the RBA’s recent decision to hold the benchmark lending rate unchanged and Switzerland’s burgeoning economic troubles helps to dampen this frequently volatile fundamental driver. For the range itself, we are positioned on the floor of a broader wedge formation which coincides with the base of a recent congestion zone. We are still well above the bottom of this formation; but it is essential to let the trade come to us – and frequent swings within these bounds make it very likely that our suggested entry orders will be hit.
Our stop is relatively tight, but this is reasonable for a strong risk/reward scenario and our time frame. To avoid undue risk, we will cancel any open orders by Friday’s close.

Event Risk Australia and Switzerland

Australia – Sentiment surrounding the Australian dollar and its economy has changed dramatically this week. Before the heavy-hitting economic data scheduled through the first half of this week crossed the wires, FX traders treated the Aussie dollar as a high-yielder with one of the best performing economies in its region. However, optimism was restrained. In a global recession, these advantages can quickly turn into burdens when the former leader is forced down to the same level of its peers (much like the pound). On Tuesday morning, market participants were offered something tangible when the RBA decided to keep rates unchanged at 3.25 percent. This fed speculation that the currency would not only retain its yield advantage until risk appetite turned around; but that it would also lead the recovery from the global recession. This last consideration was sidelined though by a weaker-than-expected 4Q GDP report; but it has not completely discouraged bulls. Over the coming week, only next Thursday’s employment data can truly add to this sentiment.

Switzerland – For years, the Swiss franc was considered one of the market’s favored funding currencies to the carry trade. And, when crisis took over for the financial markets, the currency easily fell back into its roll as a safe haven.
With deleveraged carry trades, demand for robust banks and a need for a haven from rising taxes, Switzerland was an obvious choice for large traders and portfolio managers. However, the franc’s safe haven status has increasingly come under scrutiny over the past weeks. On the one hand, growth has stalled as the Euro Zone suffers and potential financial troubles with Eastern European countries threaten to undermine the safety in the region. On the other, European Community leaders have indirectly targeted Switzerland as a tax shelter for the region’s investors, which may encourage sanctions. From the economic docket, there are a few notable releases on deck; but their market moving influence is minor. Even the SNB rate decision has little potential as they are already on a range with a low at zero.

Published on  Fri, Mar 6 2009, 05:52 GMT