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Pairs to Range Trade

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Timing Critical To Tight USDCHF Range

Fri, Mar 27 2009, 05:59 GMT
by John Kicklighter

DailyFX

The USDCHF’s tight range has grown to be impressively stable over the past few weeks; but it should still be considered a highly risk setup. At a little more than 150 points wide, this congestion band is extremely tight; and the fact that it has setup following an aggressive reversal suggests a breakout could develop rapidly.

Why Would USDCHF Hold a Range?

• Levels to Watch:
  -Range Top: 1.1330 (Fib)
  -Range Bottom: 1.1175 (Fib, SMA)

• While there is a considerable level of event risk on both sides of the market, it isn’t the brand of data that could easily threaten a breakout from significant technical levels. From the US docket, consumer confidence and spending figures are the pinnacle of the calendar through the first half of next week and the Swiss range of data has a very feeble history for market impact. However, the presence of the G-20 meeting and Friday NFP release can certainly spark activity; but beforehand they could quiet the market.

• Congestion has been clear and consistent for USDCHF price action over the past week. However, this stable pattern falls within a larger, precarious trend reversal that still demands resolution. A major Fib carves a tidy range between the 38.2 level at 1.1330 level and 50.0 percent figure at 1.1175.

Suggested Strategy

• Long: Entry orders will be placed at 1.1195 to put us on the edge of the relatively tight range.

• Stop: Our initial stop will be set at 1.1135 is just below the range low to develop risk/reward. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (60) at 1.1255 and the second target will be 1.1315.

Trading Tip – The USDCHF’s tight range has grown to be impressively stable over the past few weeks; but it should still be considered a highly risk setup. At a little more than 150 points wide, this congestion band is extremely tight; and the fact that it has setup following an aggressive reversal suggests a breakout could develop rapidly. Therefore, we have to have a strategy that is flexible and has a streamline risk profile. Our layout is for full-sized positions; but the notional risk and consistency of recent price action warrants it. The stop is set just outside the range and both targets are achievable considering the average daily range we have seen this past week. It is imperative to considering timing with this setup. We want to avoid the potential for a major reversal over the weekend; so we will close any pending orders before Friday’s close. What’s more, even if we have a live position going into next week, this tension in this tight range will eventually encourage a breakout even if the presence of major event risk (like Thursday’s G20 meeting and Friday’s NFPs) is anchoring price action; so we will look to square our books by Wednesday. Our primary interest is for the long side – due to the potential for a relief retracement and developing trend – but we will also consider a short entry near 1.1315 with equivalent stop and targets.

Event Risk for US and Switzerland

US – The US docket maintains its consistent pace through the coming week. There are a range of economic releases on deck – and they may actually have greater consequence on long-term growth than the indicators released over the past week – but their influence on actual market activity is still likely to be played down by a preoccupied fundamental trader. Nonetheless, we will be watching the data for any unwanted influences on volatility near range boundaries. Friday holds the personal income and spending numbers to gauge the consumers influence on growth through the first quarter, while Tuesday’s consumer sentiment report will gauge willingness to spend and borrow in the current month. Factory activity comes into focus in the latter half of the week with Wednesday’s ISM manufacturing report and Thursday’s Factory orders report. However, despite this data, we need to be mindful of the dollar’s fight to maintain its safe haven and reserve currency status. This is a vague and highly disputed argument; but we may see some conclusiveness on the subject with Thursday’s G-20 meeting and Friday’s non-farm payroll numbers.

Switzerland – Data from the Swiss docket is heavy compared to its average set of releases. Before the weekend, the KOF leading economic composite report will give a loose benchmark for growth forecasts that round out the first quarter. This indicator however does not provide a historically accurate forecast to true GDP; so its market impact will likely be controlled. Heading into next week, the UBS consumption survey and SMVE PMI will offer a good, timely reading on spending from the consumer and business sectors – two of the primary components of Swiss GDP (along with exports). However, just like the rest of the market, franc traders will be tuned in to the G-20 meeting on Thursday. Switzerland’s role as a tax shelter and other protectionist musings could come to a head in this forum.

Published on  Fri, Mar 27 2009, 06:07 GMT