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Pairs to Range Trade

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A Stalled Dollar Still Requires a Quick Range Setup for USDCHF

Wed, Mar 25 2009, 05:46 GMT
by John Kicklighter

DailyFX

Like we said yesterday, the bearish wave in the dollar has been sidelined; and many of the majors are threatening at least modest retracements. USDCHF has some of the most encouraging technical and fundamental buffers to generate range conditions; but the risk taken with such a setup is substantial.

Why Would USDCHF Hold a Range?

• Levels to Watch:
  -Range Top: 1.1355 (Fib, Pivot)
  -Range Bottom: 1.1165 (Fib, SMA)

• The fundamental back and forth behind USDCHF is largely the product of the dollar’s future. There are considerable safe-haven considerations for both the US and Swiss currencies; but this over-bearing driver has dissipated for both as risk in general has deflated. With USDCHF reestablishing its correlation to EURUSD price action, it is safe to assume that the greenback is taking control of price action. Data fills out this week; but the real market moving potential is in debate over the dollars reserve status.

• For a range, USDCHF’s congestion is limited and rather risky. However, aligning ourselves with the probable breakout would help to stabilize the potential for loss. After the 800 pip plunge in this pair over the past week, we have seen a major 50% Fib and 100-day SMA step in as support for a reversal.

Suggested Strategy

• Long: Half-size entry orders will be placed at 1.1190 well below spot; but certainly necessary.

• Stop: Our initial stop will be set at 1.1115 is set purposely well below the confluence of support. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (75) at 1.1265 and the second is aggressive at 1.1335.

Trading Tip – Like we said yesterday, the bearish wave in the dollar has been sidelined; and many of the majors are threatening at least modest retracements. USDCHF has some of the most encouraging technical and fundamental buffers to generate range conditions; but the risk taken with such a setup is substantial. Before even discussing the potential in such a setup; it is important to acknowledge that recent price action (and the basis for our congestive trade) is so far just a stalled bear trend. Our strategy must take into account this danger; so we have lowered our position size (to a very low level of nominal risk) and set the initial stop just below recent congestion. What’s more, our setup has to be able to take profit in two out of three scenarios to compensate for the potential of a recharged bear trend. Therefore, we are calling for an aggressive entry and targets that fall within the range of the past 48-hours – meaning it should be easy to take profit in a timely manner. This is a short-lived setup; so we will cancel any open orders by Thursday or should spot hit 1.1375 before we are entered.

Event Risk for US and Switzerland

US – Data scheduled for release from the US docket is historically noteworthy; but its potential in current market conditions is far reduced. From the laundry list of indicators scheduled for release over the coming week, we will see indicators that will cover housing activity, consumer spending, factory activity, employment and long-term growth.
However, it is prudent to realistically project the kind of reaction each of these indicators could have on price action.
The general consensus of the US economy is a deep recession that is still on pace to further slow to its worst pace in decades. It stands to reason that market participants have priced in much of the worst for the US economy such that ongoing declines will have little net impact on overall price action. Alternatively, a modest uptick in data will not easily revive sentiment as the global downturn has turned most traders into pessimists and skeptics. The real fundamental action will follow the discussion behind the dollar’s safe haven status and the potential for the world to change its long-held reserve currency.

Switzerland – Like the Japanese yen and US dollar, the Swiss franc’s tectonic fundamental driver will be its status as a safe haven. All three currencies have recently seen their ability to offer harbor to panicky markets wane due to unique considerations. For the Swissie, policy officials forecasts for a deepening recession, European leaders accusations that the country should be sanctioned as a tax shelter and the SNB’s use of intervention to prevent further appreciation in the exchange rate have put the safe haven policy into question. It is difficult to foresee the catalysts for a shift in this market driver; so range traders will have to worry about the scheduled event risk on the Swiss docket in the meantime. Looking at the calendar, there are no releases due over the term of our open orders; but data could factor in for a live position. Friday will bring the KOF leading growth reading for March. However, this indicator’s reliability is circumspect and the market frequently ignores a release that contradicts the general mood of the market. The same can be said about next Tuesday’s consumption report – even though the indicator is a good gauge for the consumer sectors contribution to growth.

Published on  Wed, Mar 25 2009, 05:54 GMT