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Pairs to Range Trade

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Building Technical Pressure Necessitates A Quick AUDUSD Range Trade

Tue, Mar 10 2009, 10:17 GMT
by John Kicklighter

DailyFX

Risk is high and technical support is lacking for a short-term AUDUSD reversal to hold the pair within its range; but the alternative would be a major trend change for this pair which doesn’t have much fundamental backing. Therefore, with enough room to sustain its range and without immediate breakout pressure, we will follow the path of least resistance.

Why Would AUDUSD Hold a Range?

• Levels to Watch:
  -Range Top: 0.6850 (Fib, Double Top)
  -Range Bottom: 0.6285 (Trend, Range Low)

• Will the Australian economy be the first among the G10 to see a genuine rebound in activity? Can US fundamentals support the dollar’s position as a safe haven for the currency market? Where is the next wave in risk appetite going? These are the prominent themes at work behind AUDUSD. These are long-term issues; and there is little in the way of scheduled event risk that can promise a straightforward answer to any of them. However, the market can make its break at any time.

• There are a series of trends building a case against for a bearish break of AUDUSD congestion. The falling trend from the Jan. 7th swing high is putting pressure behind a bias. Alternatively, the steady and gentle rising trend from the October swing low is working with a horizontal range low at 0.6285.

Suggested Strategy

• Long: Half-size entry orders will be placed at 0.6325 to account for the rising trend.

• Stop: Our initial stop will be set at 0.6205, which is relatively tight, but covers the rising trend. 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 0.6445 and the second is set to 0.6525.

Trading Tip – Risk is high and technical support is lacking for a short-term AUDUSD reversal to hold the pair within its range; but the alternative would be a major trend change for this pair which doesn’t have much fundamental backing. Therefore, with enough room to sustain its range and without immediate breakout pressure, we will follow the path of least resistance. However, it is important to prepare for the worst. Realizing that the dominant trend is still bearish and there has been a notable drift in lower highs since the beginning of the year, we will reduce size on the orders to half to lower the risk profile of the setup.
Considering the rising trend that calls up support has a very mild slope and lines up with a loose triple bottom around 0.6285, a break should be relatively clean (no false moves to whip us in and out). Our first target equals risk as usual and the second is set below the mid-point of our predefined range. This setup should play out as expected or be negated relatively soon, so we will cancel any open orders by Wednesday or should spot hit 0.6450 before we are entered.

Event Risk Australia and US

Australia – The Australian dollar is heading into a relatively quiet week – in comparison to the heavy data that has crossed the wires in the previous week. However, the rate decision and growth figures that did cross the wires will nonetheless have a lasting impact on price action. After the RBA decided to hold rates last Wednesday, there was a significant pressure placed on the Australian currency to stand as the first G10 economy to pull out of the severe global recession. As this is an unlikely outcome – especially following the unexpected contraction in the fourth quarter GDP numbers – the market will be on pins and needles as they look for confirmation either way from forthcoming data, unscheduled event risk and the general state of risk trends. From the economic docket, there are a few notables to follow. Tuesday’s Westpac consumer sentiment survey is notable but ultimately has little influence. Next Monday’s RBA minutes are beyond the natural time frame of our position. The jobs figures hold significant tout though as a key gauge of health.

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 this week than the past one has been. The highlights will be this 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.

Published on  Tue, Mar 10 2009, 10:23 GMT