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Pairs to Range Trade

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Placing A AUDJPY Range Trade Around the Weekend is a Matter of Risk Appetite

Mon, Mar 16 2009, 05:54 GMT
by John Kicklighter

DailyFX

As the week draws to a close, many of the young trends that were developed over the past few sessions have started to pull back from their respective highs and lows to ease technical pressure into the weekend. However, the potential for these trends to be revived or new breakouts to develop is high; so our AUDJPY setup comes with considerable risk.

Why Would AUDJPY Hold a Range?

• Levels to Watch:
  -Range Top: 64.75 (Trend, Fib)
  -Range Bottom: 61.25 (Fib, SMAs, Pivot)

• The trends that have developed in the currency over the past week are all pulling back heading into the weekend. For AUDJPY, there has been no clear burgeoning trend – but volatility has been a big player. Scheduled event risk from either side of the market is very low. From the docket, there is a modest threat from the RBA minutes and BoJ rate decision, but they will likely offer little of value. The real concern with this pair is risk trends. And, with the Group of 20 meeting, Monday could be active.

• With the weekend volatility drain approaching, we will see better definition in the AUDJPY’s range. This pair has enjoyed a consistent but choppy advance since Feb 2nd, but yesterday’s spike low has tripped bulls up. The real block though is the 50% Fib and five-month trendline sitting at 64.75.

Suggested Strategy

• Short: Half-sized entry orders (or smaller) will be placed at 64.35, well below resistance.

• Stop: Our initial stop will be set at 65.75, which is wide enough for substantial volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (140) at 62.95 and the second is set to 61.95.

Trading Tip – As the week draws to a close, many of the young trends that were developed over the past few sessions have started to pull back from their respective highs and lows to ease technical pressure into the weekend. However, the potential for these trends to be revived or new breakouts to develop is high; so our AUDJPY setup comes with considerable risk. This pair, however, is helped along by a stable range that has prevented the pair from developing a pressing bias with this week’s price action. What’s more, yesterday’s deep plunge and reversal has broken the stride of clearly developed momentum in the rising trend from February. Our interest in the short side of the market is consistent with the dominant trend and rests on strong resistance. Entry should be determined by one’s appetite for risk. Taking a position before the weekend opens up the possibility of a weekend breakout; but waiting until after the weekend could mean missing a trade. Regardless of the means of entry, risk needs to be further reduced. The suggested strategy looks for a halved position size (or less) while using wide stops. The wide stop necessitates a distant first target and the range culls the potential for the second half; but high volatility could move our position to its objectives quickly. Timing is critical considering the narrow range and high level of activity. We will cancel any open orders by Tuesday’s Asian session or should spot hit 62 before we are entered.

Event Risk for Australia and Japan

Australia – The Australian dollar’s fundamental future is highly uncertain; but not from the regular economic indicators that usually threaten short-term volatility. Global investors are singularly focused on the health of the world’s economy and ongoing financial crisis. The IMF has forecasted the first contraction in world-wide growth since WWII, while Japan, the United Kingdom and US are all pricing in disturbing extensions to their respective recessions for the first half of 2009. This has led traders to sacrifice the potential for yield in return for safety of funds. However, with a general consensus that the Aussie economy will retain its high interest rate and its own slump will be relatively reserved, many believe the country’s currency and assets offer the best of both worlds. This is a fragile hope though. Depending on the severity of fear in the market, a relative lack of liquidity in the Aussie dollar can draw interest away. What’s more, there will be a greater sensitivity to data that comes off the docket.
Top event risk next week will be 1Q factory activity and 4Q housing construction.

Japan – In the past few weeks, the Japanese yen has seen its safe haven status come into question as a sharp contraction in 4Q GDP raised criticism as to the viability of protection in its long-struggling markets. Recently, the sense of uncertainty has been leveraged by the SNB’s plans to intervene in the currency market to halt the painful appreciation of the Swiss franc. Since this announcement, speculation that Japan will adopt a similar approach to bolster exports has grown. For short-term spikes in volatility, there are a few threats to volatility. The BoJ rate decision may usher new, unusual policy approaches; and the BSI will show the pain in factory activity.

Published on  Mon, Mar 16 2009, 06:00 GMT