AUD/CHF Descending Channel Provides Swing Trading Opportunity

The Aussie-Franc pair is generally view as a strong indicator of market sentiment given the nature of its two components: the Aussie represents a ‘risky’ asset; the Franc represents a ‘safe haven’ asset. As such, given the uncertainty in the broad market sentiment that reflects risk-aversion over the past several weeks, mainly due to rising concerns on the ability of Greek to remain solvent and whether or not the European Troika would give Greece additional funds. Event risk that panned out to instill fear in the markets last week, revolving around poor data out of the United States, provoked a global shift to safer assets, and hence, the Swiss Franc has soared across the board. Now, with the pair at extreme technical levels, and an event on the docket Tuesday that has historically sparked volatility, the AUD/CHF pair provides traders an opportunity to collect profits on a swing trade in either direction.

Levels to Watch:

-Range Top: 0.9700 (Trend)

-Range Bottom: 0.8640 (Trend)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy - Long

• Long: Place an entry at 0.9011
• Stop: Set the stop to 0.8861 (150-pip risk)
• Target: The first target is 0.9144 (23.6 Fibo, move Stop to 0.9081), second target is 0.9370 (50-SMA)
• Timeframe: 4 to 8 days

Suggested Strategy - Short

• Short: Place an entry at 0.8861 (2010 Low)
• Stop: Set the stop to 0.9011 (150-pip risk)
• Target: The first target is 0.8711 (move Stop to 0.8781), second target is 0.8640 (Range Bottom)
• Timeframe: 2 to 3 days

Trading Tip – The Reserve Bank of Australia is widely considered to leave rates on hold at 4.75 percent, though the commentary afterwards, and its bias – hawkish or dovish – will give the pair direction for the remainder of the day. As such, on hawkish commentary, which would suggest that the central bank could raise rates in the future, there is a long scenario; if the bank suggests that rates will remain on hold and the focus is on the poor GDP reading from the first quarter, then a short trade scenario is played out. The AUD/CHF pair would likely have more momentum to the upside, on a technical basis, given the extreme sentiment wound into the pair. The daily RSI is dropping, now below the key oversold level, at 30. On a technical basis, a buy signal is suggested, as the Slow Stochastic oscillator has turned higher, with the %K greater than the %D, at 14 and 10, respectively. Similarly, the MACD Histogram appears to have peaked into its bearish divergence, and the differential is now tailing. Hawkish rhetoric would accelerate the differential into a bullish divergence. On the other hand, a trade on either side of the pair should not be entered until the central bank indicates its intent on its interest rate policy.

Event Risk for Australia and Switzerland

There is significant event risk on the docket for the next 24-hours, with the Reserve Bank of Australia Rate Decision headlining events for the forex market. There is also significant data on the docket for Switzerland, so there exists much opportunity for large swings in volatility over the next day.

Australia – The Reserve Bank of Australia is expected to leave rates on hold at 4.75 percent, with the Overnight Index Swaps showing a mere 16.0 percent chance of a 25.0-basis point rate hike at tomorrow’s meeting. Similarly, only 26.0-basis points have been priced in for the next 12-months. As such, with expectations of a hike muted, traders will look for the ensuing commentary in order to determine the direction of Aussie-based pairs over the next several trading sessions.

Switzerland – The Franc has appreciated greatly across the board the past several weeks, and not just due to a shift to risk-aversion: an earlier inflation report suggested that the Swiss National Bank would have to raise rates in order to stem the effects of rising price pressures. Accordingly, with CPI data for May due out tomorrow, funds could flow into the Franc should data show that a rate hike in 2011 is a necessity for the central bank.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX