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Pairs to Range Trade

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A Resistance To Risk Trends May Serve The USDCHF Range Well

Mon, Mar 9 2009, 06:27 GMT
by John Kicklighter

DailyFX

Most of the most liquid majors and crosses are teetering on the edge of a major trend revival; but constant threats of reversals have kept the market from making its move. Any number of fundamental drivers can ultimately decide the break; but general risk sentiment is the most probable catalyst. From this perspective, USDCHF is perhaps the best the best equipped range-based pairs in the market to hold out should economics act up.

Why Would USDCHF Hold a Range?

• Levels to Watch:
  -Range Top: 1.1800 (Fib, Range High)
  -Range Bottom: 1.1500 (Fibs, Trend, SMA)

• There is a fundamental ambiguity to USDCHF. Both economies are suffering from economic recessions and have interest rates that are hovering as close to zero as their respective central banks are likely to allow the targets to go. However, these conditions don’t seem to be as important as perceived safety. Switzerland has long been known as the world’s bank. However, with European officials looking to crack down on tax havens, this traditional cove for funds may bow to the liquidity of the US Treasuries.

• Congestion has been indelible to USDCHF price action since the end of January. However, the pair’s chop has offered little rhythm for an honest range trade. Within the constraints of a general, rising trend channel, we see today’s sharp drop testing a loose rising trend, SMA and Fib around 1.15.

Suggested Strategy

• Long: Half-size entry orders will be placed at 1.1530 which is just above the range of support.

• Stop: Our initial stop will be set at 1.1430, which is tight and can’t withstand a surge in volatility. 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 1.1630 and the second is set to 1.1730.

Trading Tip – Most of the most liquid majors and crosses are teetering on the edge of a major trend revival; but constant threats of reversals have kept the market from making its move. Any number of fundamental drivers can ultimately decide the break; but general risk sentiment is the most probable catalyst. From this perspective, USDCHF is perhaps the best the best equipped range-based pairs in the market to hold out should economics act up. While the US and Swiss economy have vastly different growth potential and exposure to further financial troubles, each is considered a safe haven. This negated exposure should help to buffer USDCHF to much of the volatility and momentum that builds through a shift in risk appetite that could send other pairs rallying. From a technical perspective, we are looking for a congestion setup after a very aggressive decline. This is a dodgy prospect; but we will rest on the strength of the rising trend channel. Stops have been set very close to support; but it is necessary given the risk/reward and profit potential. Though it is a risk, we will leave pending orders open until Monday – though it is imperative to follow weekend even risk and watch price action on the open.

Event Risk US and Switzerland

US – A round of important economic data has been released from the US docket and it has anchored the economy firmly to its recessionary title. However, this is less of a concern for investors that have grown tolerant owing to the global slump. Going forward though, traders will have to evaluate whether the greenback can stand as a safe haven and economic leader as government efforts to turn economic activity around and stabilize the flow of capital have so far failed. Considering the data from the US coffers is consistently disappointing, this will have to be a relative value. With the UK and Japan falling into deeper recessions with broader financial troubles while the Euro Zone is threatened by the potential collapse of Eastern European countries, the dollar still has the advantage in terms of safety. For tangible and scheduled event risk, the US docket is far lighter next week than the past one has been. The highlights will be next Thursday’s retail sales report and the following Monday’s consumer sentiment survey – offering a general read on consumer health – the best hope for a broad economic recovery later down the line.

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  Mon, Mar 9 2009, 06:33 GMT