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Pairs to Range Trade

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EURAUD: One of the Few Viable Ranges Left in the Currency Market

Fri, Mar 20 2009, 05:43 GMT
by John Kicklighter

DailyFX

After the surge in volatility across the currency market over the past 36 hours, there are very few viable range trades to be found. However, with a quickly depleting fundamental cushion, we have seen EURAUD maintain its dangerously consistent congestion band.

Why Would EURAUD Hold a Range?

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

• Economic stability is the single most prized fundamental trait for the currency market at this point in the global financial crisis. Both the Euro Zone and Australian currencies maintain some semblance of safety; but the future is shaky and the balance between the two won’t last for long. For the Euro Zone, financial strains have grown as leaders take a wait-and-see approach as Eastern Europe inches towards default. Australia has suffered seen less trouble, but a recession is inevitable.

• There is little doubt about the presence of the EURAUD’s range. There is surprisingly stable band of congestion between 2.00 and 1.9425 hemmed in by Fib retracements and long-term pivots. This could go on forever if not for a closing wedge that began Dec 29 for resistance and Jan 6 calling support.

Suggested Strategy

• Short: Half-size entry orders will be placed at 1.9950 which is well below the hard ceiling.

• Stop: Our initial stop will be set at 2.0060, which relies on consistency even though it is close. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (110) at 1.9840 and the second is set to 1.9710.

Trading Tip – After the surge in volatility across the currency market over the past 36 hours, there are very few viable range trades to be found. However, with a quickly depleting fundamental cushion, we have seen EURAUD maintain its dangerously consistent congestion band. Yesterday’s volatility did encourage significant price action; the tides ended up breaking at the top of the now popular range. Always on the look out for risk, the biggest threat to this technical constancy is the range itself. When there is so much speculative interest in a formation like this, it takes only a modest push to trigger a slew of stops and entry orders and turn what would have otherwise a swing high or low into a genuine breakout. That is the risk we run with here. However, it is unnecessary to widen stops to counter this threat because a push is likely to end up as a genuine break. Therefore, we have placed the stop on our suggested strategy just above the range of highs in the pivot we have seen since February. As this is still a notionally wide cutting point, we have lowered position size to lower risk. Another important component of this layout is reasonable targets. Looking at the five weeks of tight chop that has developed, it is clear that there is an unspoken mean around 1.96 to 1.97. Therefore, a pull back will naturally gravitate to a point below our second target. To avoid a shift in market sentiment, we will cancel open order by Friday’s close or should spot hit 1.9750 first.

Event Risk for Euro Zone and Australia

Euro Zone – Scheduled event risk poses little threat to the euro’s immediate future. The only indicator to fall within our open order time frame is the Euro Zone industrial production report for January. As a composite indicator for January, it is lagging and provides little additional guidance on growth forecasts. Looking beyond the weekend, volatility could rise (if we are in an active position) thanks to more influential data crossing the wires. On Tuesday, the German and Euro Zone PMI data will give the most up to date measure of economic activity for the region. The following day sees the IFO business sentiment survey for March – an interesting indicator after European leaders denied region-wide bailout plan and the lack of a G20 plan. The GfK confidence report will be more tuned to more objective growth forecasts.

Australia – The Australian dollar may end up being not only the most fundamentally sound economy of the Far East, it cold possibly be the best harbor for capital (in good and bad times) for the entire currency world. While the rest of the world is suffering dire economic recessions and financial crises, Australia has been able to whether the worst of it while maintaining a relatively high yield. This is a fact that has been marred by sentiment however (the US, Japan and Euro Zone have all been treated as safe havens and invariably lost their status over the 18 months). Despite the RBA’s decision to hold the nation’s benchmark rate at 3.25 percent at its last meeting, there is still uncertainty surrounding the ultimate pace of the economies dip into recession. Investors will be looking for clear cues from economic data, but there is little on the docket. The best compass will come from next week’s RBA financial stability review.

Published on  Fri, Mar 20 2009, 05:48 GMT