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Pairs to Range Trade

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A Quick Range Setup On the Opposite Side Of AUDUSD Congestion

Thu, Mar 12 2009, 05:48 GMT
by John Kicklighter

DailyFX

The Australian dollar crosses have offered the best range scenarios for the better part of a week; and the AUDUSD setup we see today is the opposite side the congestion zone we were following at the start of this week.

Why Would AUDUSD Hold a Range?

• Levels to Watch:
  -Range Top: 0.6525 (Trend, Fib, Range)
  -Range Bottom: 0.6285 (Triple Bottom)

• As with all Aussie dollar pairs, AUDUSD is imbued with direct link to risk sentiment. However, the fundamental engine behind this pair is a little different than it is with the crosses. The Australian dollar is the prime magnet for risk appetite considering it is the highest yield of the majors at 3.25 percent after the RBA held at its last meeting. And, though the Aussie economy is the strongest among its peers, recent data is testing it. The US on the other hand is seeing its safe have status fade.

• Congestion for AUDUSD is choppy. The long-term triple bottom down around 0.6275 is a general level that covers the closes of three prominent lows; but large wicks in the area denote volatility. Resistance is equally choppy but a general range of highs around 0.6525 is reasonable with the right stop.

Suggested Strategy

• Long: Entry orders will be placed at 0.6510 for an aggressive entry on a blurred range.

• Stop: Our initial stop will be set at 0.6580 which should be wide enough to cover tails in the area. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (70) at 0.6440 and the second is set to 0.6370.

Trading Tip – The Australian dollar crosses have offered the best range scenarios for the better part of a week; and the AUDUSD setup we see today is the opposite side the congestion zone we were following at the start of this week. However, this range and the relatively tight trading bands across most of the crosses have become quite mature - meaning breakout potential is building.
The previous approach to this pair was working with a support that was far stronger (with a significant triple bottom) even if it was less defined. Resistance is called upon a choppy range of highs that has been in place for nearly four weeks. The dominant trend is still in the bear trend’s favor; but we are still exposed to a reversal and more importantly a false break. We need a stop that is wide enough to cover a shock in volatility that isn’t a true break. A cut off point at 0.6580 is set well above the recent range of highs; so it should hold up until the market develops a genuine trend. On the flip side of the coin, our objectives are well within reach and should take no longer than a few days to play out. Therefore, we will cancel any open orders by tomorrow and close out any open positions before Friday’s close.

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 – The US docket is populated with a few notable economic releases for the coming week; and most of these figures will feed into speculation of whether the US dollar can support its status as a growth leader and safe haven for global capital. Since the October shock to financial markets, the greenback has rose steadily as investors transfer their ailing account balances into US Treasuries. Further in the past few weeks, the world’s most liquid currency has even overtaken is Japanese counterpart as the top harbor to the rough seas of the global markets thanks to the island nation’s plunge into a severe recession and a lack of policy response from the government. However, the market is also beginning to question safety of funds with the US. Data is pointing to an accelerated recession through the first half of 2009 – and policy so far seems to be changing little. Thursday’s retail sales and Friday’s confidence figures will take vital readings of consumer activity. Next week, factory activity and inflation data will fill out the first half of the week.

Published on  Thu, Mar 12 2009, 05:53 GMT