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Pairs to Range Trade

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Long Term Congestion Stabalizes The Fundamental Debate Behind CHFJPY

Mon, Mar 23 2009, 05:46 GMT
by John Kicklighter

DailyFX

Mid-week momentum that sent so many currency pairs to major breakouts seems to have settled into the weekend. In the aftermath of all the action, there are many new short-term congestion opportunities; but their stability is highly circumspect. Therefore, we will fall back on an appealing CHFJPY setup with established technicals and some level of fundamental stability.

Why Would CHFJPY Hold a Range?

• Levels to Watch:
  -Range Top: 86.00 (Trend, Fib)
  -Range Bottom: 82.00 (Trend, Fib, Pivot)

• The Swiss franc and Japanese yen were the FX market’s top safe haven currencies just a year ago. However, fundamentals – as they are apt to do – are changing. With both economies suffering major recessions and investors’ definition of safety becoming more critical, these traditional go-to currencies have seen their primary economic foundation shaken. Going forward, traders will have to gauge which currency is losing its correlation fastest and the general direction of risk sentiment.

• CHFJPY has cut a ‘W’ pattern (double bottom with a falling trend made of three swing highs) since late October. Today’s rally is driving spot back for its fourth test of that trendline – which further acts as a potential double top with Mar 10th that is accompanied by a long-term 38.2 percent Fib.

Suggested Strategy

• Short: Half-size entry orders will be placed at 85.55 on Monday to avoid the weekend.

• Stop: Our initial stop will be set at 86.75, which does not cover the December swing high. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (120) at 84.35 and the second is set to 83.15.

Trading Tip – Mid-week momentum that sent so many currency pairs to major breakouts seems to have settled into the weekend. In the aftermath of all the action, there are many new short-term congestion opportunities; but their stability is highly circumspect. Therefore, we will fall back on an appealing CHFJPY setup with established technicals and some level of fundamental stability. Gauging the threat of breakout, we have to balance the strength of congestion against the potential shift in major economic drivers. Currently, stability in CHFJPY is based on the proposition that both the franc and yen are safe haven currencies that are loosing their appeal as a harbor in rough financial seas. This is clearly a precarious position as sentiment has the tendency to change quickly and safety is inherently an impression of the crowd. On the other hand, the formation in historical charts shows a very sturdy period of congestion that began after the October panic that has produced very clear boundaries that have curbed clear trends. At the same time, a steady rising trend and today’s momentum still threatens a breakout; so we have to be cautious. We will not place our orders until after the weekend as unforeseen events could dramatically change market conditions. Acknowledging breakout risk, we will cancel open orders by Wednesday.

Event Risk for Switzerland and Japan

Switzerland – Swiss economic data has taken a greater role in guiding the franc’s price action; but traders are still more interested in the currencies primary role as a shelter from economic uncertainty and taxes in the global marketplace.
Over the past few weeks, European Leaders have demanded Switzerland offer greater transparency on foreign national funds entering the economy to avoid their native taxes and further exacerbate the lack of money in their markets. The Swiss authorities have placated the crowd somewhat; but as conditions worsen, desperate leaders will demand more.
As for scheduled economic event risk, there are only two remarkable indicators scheduled for release: the money supply figures and KOF leading indicators composite. Their impact is relatively minor; but an intensified focus on economic and financial health may leverage more of a reaction from the market.

Japan – Is the Japanese yen still the safe haven of choice for international investors? Is it a safe haven at all? This is the trend-defining question that yen traders will be debating for weeks to come. In the past, the currency’s link to protection was unquestioned by speculators. However, when market participants started to see that even sound investments were succumbing to dire conditions, a critical eye was turned on the Japanese currency. What was seen was the worst recession in decades, growing capital deficits and a government that was struggling to pass necessary legislation to stabilize the economy. This is still a fundamental consideration in development; so debate will rage. In the mean time, we should also keep tabs on the economic docket. Starting immediately next week is the first quarter Business Sentiment Index report. This is followed latter on by inflation, retail consumption and factory activity figures – a broad look at recent activity and the pace of the now indisputable recession.

Published on  Mon, Mar 23 2009, 05:50 GMT