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Pairs to Range Trade

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A Tight Range And The Approaching G20 Meeting May Offer A Quick GBPCHF Range

Wed, Apr 1 2009, 06:16 GMT
by John Kicklighter

DailyFX

Time is winding down to the G20 meeting on Thursday; so those risk-sensitive currency pairs that have fallen to congestion recently should be examined critically. The potential for volatility, breakouts and renewed trends induced by this single event is far too high to lapsidasically trade through. However, considering there are serious time constraints and technical formations need to be clearly defined, GBPCHF may offer one of the best setups under the circumstances.

Why Would GBPCHF Hold a Range?

• Levels to Watch:
  -Range Top: 1.6450 (Triple Top, Fibs)
  -Range Bottom: 1.6225 (Trend, Fib)

• Major fundamental risk lies just below the surface for GBPCHF; and any number of events could catalyze a sudden surge in volatility. The biggest threat to stable a market is Thursday’s G20 meeting. Global policy makers, ailing consumers and investors expect a lot from the gathering; but the probability of developing a true fix to the world’s ills is very low. Filling the time before and after this key event, we also have a significant round of timely data from the UK and constant threat of SNB intervention.

• Congestion is clearly defined between 1.6450 and 1.6225. A series of daily highs and lows has confirmed the presence of a confluence of many different Fib series at both the highs and lows. A look at the higher time frame outlines a wedge formation with a dominant bear trend behind it.

Suggested Strategy

• Short: Entry orders will be placed at 1.6420 – aggressive but necessary for the tight range.

• Stop: Our initial stop will be set at 1.6475 a tight stop, but outside our range top nonetheless. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (55) at 1.6365 and the second target will be 1.6300.

Trading Tip – Time is winding down to the G20 meeting on Thursday; so those risk-sensitive currency pairs that have fallen to congestion recently should be examined critically. The potential for volatility, breakouts and renewed trends induced by this single event is far too high to lapsidasically trade through. However, considering there are serious time constraints and technical formations need to be clearly defined, GBPCHF may offer one of the best setups under the circumstances. Our strategy looks to exploit a congestion pattern that is little more than 200 points wide, has very clear boundaries and is amply supported by different technical points. The width of this band is very important. Typically when a pair this volatile is stuck within such a tight range, it typically leverages the potential for a breakout. In this case though the presence of Thursday’s event risk could actually prevent the market from producing a significant breakout as market participants are unwilling to speculate on direction before a surge in activity. What’s more, we have the added benefit of clear levels to place stops and targets that are notionally tight. Our primary bias is for a short position (as it holds with the dominant trend), but we would be open to both sides of this range. The most important condition for this setup is timing. We cancel all open orders before the start of the London session on Thursday or move stops up to breakeven for open positions.

Event Risk for UK and Switzerland

UK – It is perhaps appropriate that London will host the G 20 summit on April 2nd as the UK has been pegged by many to be the worst performing industrialized economy in 2009. This means that the British economy and its currency stand to benefit the most from a proactive outcome that spreads the burden and responsibility of a financial rescue evenly across the major economic players. Coming to such an agreement will be very difficult however. Tangible policy points that point to a coordinated effort would beat the odds and give the sterling a fundamental boost. Otherwise, hope for a near-term recovery from the nation’s deep recession will be put off. Looking at outside of the G20 meeting, there will further be a substantial round of event risk to cross the wires throughout the week – though its impact on price action will be skewed by the presence of the summit. Of note over the coming week, we have the nationwide consumer confidence figure to gauge consumer health. For the best measure of growth though, the PMI service, manufacturing and construction numbers will give a broad view of growth.

Switzerland – Like the rest of the currency market, the Swiss franc has a primary, fundamental focus for the week: the G 20 meeting. While the Swissie may not see the kind of reaction that the dollar and yen may experience; as a key risk aversion currency, the franc may see a dramatic increase in volatility regardless of whether policy authorities produce a coordinated rescue effort or not. What’s more, recent commentary from global leaders has suggested the group will take a hard stance against protectionism (like harboring funds and currency manipulation). Outside the orbit of the policy meeting; the PMI and CPI data will likely offer little for price action.

Published on  Wed, Apr 1 2009, 06:28 GMT