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Pairs to Range Trade

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A Clear Range Sets Up A Good Opportunity For The Exotic USDNOK

Tue, Mar 17 2009, 05:53 GMT
by John Kicklighter

DailyFX

One word can describe USDNOK price action over the past five months: consistency. Traders may shy away from this exotic pair with its seemingly high level of volatility; but pip cost and perspective reveal one of the best range setups so far this year.

Why Would USDNOK Hold a Range?

• Levels to Watch:
  -Range Top: 7.2850 (Trend, Fib)
  -Range Bottom: 6.6850 (Fib, SMAs, Pivot)

• Indicator-based event risk is relatively lax for the USDNOK pair over the coming week. However, larger fundamental themes are on the move – producing a very real threat to the congestion this pair has been carving since November – a mature range indeed. Global policy makers’ efforts to revive growth and stabilize the banking system is topping the list of concerns for this low liquidity pair. The slow rebound in crude prices is also a direct interest to the oil-dependent Norwegian economy.

• It is impossible to miss the mild-mannered, ascending wedge that has developed for USDNOK over the past five months. Resistance is more precise with six unique swing highs that set a range around 7.2850. However, the bullish bias backs support with a key trend and recent triple bottom.

Suggested Strategy

• Long: Half-sized entry orders will be placed at 6.7250 which is well above the rising trend.

• Stop: Our initial stop will be set at 6.60, which is well below the trend and Feb. swing low. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (1250) at 6.8500 and the second is set to 7.0100.

Trading Tip – One word can describe USDNOK price action over the past five months: consistency. Traders may shy away from this exotic pair with its seemingly high level of volatility; but pip cost and perspective reveal one of the best range setups so far this year. From a technical perspective, this is the ideal congestion trade. The market has developed a very blatant zone of price action with a wide berth and a gentle rising trend for support, which puts next-to-no breakout pressure behind this pair. However, there is certainly trouble brewing behind fundamentals.
Considering the dollar’s correlation to risk trends with the krone’s link to crude prices and need for general market liquidity, the lack of headway made at this past weekend’s G20 meeting presents the kind of uncertainty that could topple such a prevalent period of price stability. Our strategy looks to compensate for the risk. First and foremost, the prospect of a 1,250 point loss is daunting, but this is equivalent to only 125 points on a standard pair (like EURUSD). This makes the setup seem much more manageable. With half size positions and a stop that is set below the trend and last major swing low, the risk profile is low and well-defined. To limit our exposure to changes in market temperament, we will cancel any open orders by Wednesday or should spot hit 6.90 first.

Event Risk for US and Norway

US – Event risk from the US docket is set with historical market movers; but these are not the indicators of 18 months ago. With the US recession already well-underway and the market actively pricing in much worse to come, the housing and manufacturing indicators that are scheduled for release over the coming days offer little to fundamentally alter the future of the world’s largest economy. Tuesday’s housing starts and next Monday’s existing home sales figures will update market participants on the level of the industry’s recession; but even a notable rebound will be met by skeptical investors as a major turn will be needed before activity in this industry once again contributes to expansion.
The Wednesday’s CPI numbers will have their influence on speculation; but not for rate decisions (as the benchmark is already close enough to prevent further easing). Inflation will now be a defining component of a potential stagflation economy which could fundamentally undermine the economy’s eventual recovery. Finally, Wednesday’s FOMC meeting will be monitored not for rate changes but for announcements of additional and unique efforts aimed at stabilizing the financial sector.

Norway – Global growth and financial stability are key drivers for any currency; but they are particularly important to the Norwegian krone. As an exotic European currency; the krone is often exposed to liquidity problems as investors pull their money out of Norway to relative safe havens like the dollar and euro. After the G20 failed to produce any noteworthy policy from its meeting this past weekend; the market was once again left to its own devises for gauging the reliability of the banking system. This is further linked to growth forecasts, which drive projections for oil and natural resource consumption. However, with OPEC holding back from a production cut and global output not expected to rebound anytime soon, further reductions in crude prices mean reduced income for Norway.

Published on  Tue, Mar 17 2009, 06:00 GMT