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Pairs to Range Trade

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A Clear EURAUD Range Must Manage High Volatility and Building Breakout Pressure

Wed, Mar 11 2009, 05:48 GMT
by John Kicklighter

DailyFX

There have been few ranges over the past few months that have been as explicit as the one EURAUD has been carving. However, strong technical congestion often comes hand in hand with substantial breakout potential – and this is an adage that certainly carries over to this pair. 

Why Would EURAUD Hold a Range?

• Levels to Watch:
  -Range Top: 2.0000 (Pivot, Trend)
  -Range Bottom: 1.9425 (Trend, Fib, Pivot)

• The European and Australian economic dockets are relatively light over the next week. With no major market moving indicators that seem to threaten the bigger themes behind the market, EURAUD traders will turn to broader market news to garner direction on this frequently volatile pair. Risk appetite will likely be a trend defining market driver. However, with the weakening growth fighting the RBA’s decision to hold and the ECB’s cut shirking speculation, the dynamics can be skewed.

• The EURAUD range is one of the strongest the currency market has produced in some time. There are horizontal pivots at 2.0000 and 1.9425. The support level is further backed by a notable 38.2% Fib. There is also breakout pressure in a symmetrical wedge formation that backs both sides.

Suggested Strategy

• Long: Reduced size entry orders will be placed at 1.9500 to offer a reasonable risk profile.

• Stop: Our initial stop will be set at 1.9300, which notionally wide, but technical tight for volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (200) at 1.9700 and the second is set to 1.9900.

Trading Tip – There have been few ranges over the past few months that have been as explicit as the one EURAUD has been carving. However, strong technical congestion often comes hand in hand with substantial breakout potential – and this is an adage that certainly carries over to this pair. To trade this range, positioning and timing are essential components to a successful strategy. For our setup, we are concentrating on the asymmetrical wedge formation that has been in development since December. While this formation alone with suggest equal breakout pressure on both sides of the market; an eventual upside resolution has the advantage thanks to a trend that has been in place since July/August. It is important to focus on the closing wedge formation rather than just the horizontal levels at 2.0000 and 1.9425. This will increase breakout potential with time. What’s more, considering the volatility that this pair is prone to, we need to adjust the positioning and timing to guard against a fast break. Our entry is aggressive and follows the dominant trend. The stop is notionally wide, so position size should be half or a quarter our usual entry. Adjusted for volatility though, our stop is relatively very tight. With the range closing each day and breakout potential building, we will cancel any open orders by Friday or should spot hit 2.0100 first.

Event Risk Euro Zone and Australia

Euro Zone – Event risk from the Euro Zone docket is fundamentally important; but its market-influence is relatively restrained. Euro traders are concerned with two things: the potential for ongoing troubles in Eastern European countries to balloon into a financial crisis for the broader Euro Zone; and the likelihood that the ECB will maintain its pace of easing until they fall in line with their global counterparts that are now between zero and 0.50 percent. The former driver is the more virulent and it could be catalyzed with news that comes out of the blue. For the interest rate speculation, financial health will be a key component as will general growth figures. Data that comes out over the coming week will add to the debate; but it is for the Euro Zone and generally lags the German numbers. Retail sales, fourth quarter employment and inflation are all key economic indicators. The ZEW survey is more for the ECB.

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.

Published on  Wed, Mar 11 2009, 05:58 GMT