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Clear Momentum And Technicals May Provide A Short-Term EURAUD Range Opportunity

Wednesday, 26 November 2008 17:52:44 GMT  |  John Kicklighter, Currency Strategist

Liquidity is thinning out and risk trends are on the cusp of a major shift – meaning the conditions are not favorable for range trades. However, there are a few high-risk setups that may actually benefit through a period of chop and turbulence with help of strong technicals and offsetting fundamentals.

Why Would EURAUD Stay in a Range?   ·         Levels to Watch: -Range Top:       2.0500 (Trend, Swing High) -Range Bottom: 1.9700 (Trend, Fibs, Pivot)   ·         There are three competing fundamental forces behind EURAUD. The most immediate threat to volatility is the low-liquidity expected for the North American session over the remainder of this week – which could leverage swings in price action. More consistent are the unpredictable tides of risk sentiment which has endowed EURAUD with volatility but not direction. Finally, there is the presence of significant event risk from both sides.   ·         Congestion is clear through both the short and long-time frames; but that doesn’t mean we should ignore the momentum behind the November bull run. A rising trendline from the Nov 4th bullish reversal now coincides with a notable 50% Fib and developed pivot around 1.97. For resistance, a falling trend has capped 2.05 with the promise of a broad wedge. Suggested Strategy   ·         Long: Entry orders at 1.9750 - at half the normal position size considering our stop.   ·         Stop: An initial stop at 1.9600 is relatively modest considering the usual volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (150) at 1.9900. The second target will be 2.0100.

Trading Tip – Liquidity is thinning out and risk trends are on the cusp of a major shift – meaning the conditions are not favorable for range trades. However, there are a few high-risk setups that may actually benefit through a period of chop and turbulence with help of strong technicals and offsetting fundamentals. The EURAUD setup we are looking at today is set within congestion on a higher time frame (a broad wedge) and a lower one. However, congestion and high volatility behind this pair still require a timely and well-crafted strategy. For our outlook, we first look to follow the market’s developing momentum. To further adapt our position to the market, we have widened the stop to account for volatility and further reduced our leverage through position size. We also have to take into account the significant amount of scheduled event risk on the docket, which may have an amplified influence on price action due to the lack of US liquidity in the market. Therefore, open orders will be closed after 24 hours and any opened positions will be unwound before the week’s end.

Event Risk Euro Zone And Australia

Euro Zone – There are a number of high impact, European economic indicators scheduled for release over the coming week. Potentially affecting our initial entry over the coming 24-hours, the greatest scheduled event risk for the euro is the German unemployment change report for November. Recession is an obvious concern for the region - as it is for the entire industrialized world. As the largest sector of the Euro Zone’s largest economy, the German consumer will be a key gauge for activity going forward.  A few Euro Zone PMI and confidence gauges will round off risk for the rest of Thursday. Should we be floated in a trade, Friday’s Euro Zone CPI estimate could prove to be a high hurdle. Looking at economists’ expectations for next week’s ECB rate decision, economists are expecting a mere 25 basis point cut to 3.00 percent. If inflation drops from 3.2 to 2.4 percent as expected the scope for cuts will widen.

Australia – Like the euro’s docket, scheduled event risk in the Australian calendar will grow more intense as the week progresses. However, through our trade window, we will be concerned with only a few second-tier economic releases. At the open of Thursday’s Asian session, the 3Q private capital expenditure report will offer a key adjustment to speculation surrounding next week’s GDP report. What’s more, it will also provide an objective reading on credit conditions in Australia. On the following day, the private sector credit report will merely give a more updated reading over to the CAPEX number. Looking beyond the weekend, the presence of the retail sales report, 3Q GDP number and RBA rate decision will give fundamental traders a lot to prepare for. This could potentially anchor Aussie dollar price action or it could leverage the low volatility conditions expected in the market for the rest of this week.

Data for November 27 – December 4			Data for November 27 – December 4
Date	Euro Zone Economic Data		Date	Australian Economic Data
Nov 27	German Unemployment Change (NOV)		Nov 27	Private Sector Credit (OCT)
Nov 27	Euro Zone Consumer Confidence (NOV)		Nov 30	Company Operating Profit (3Q)
Nov 28	Euro Zone CPI Estimate (NOV)		Dec 1	Retail Sales (OCT)
Nov 3	Euro Zone Retail Sales (OCT)		Dec 1	RBA Rate Decision
Nov 4	ECB Rate Decision		Dec 2	Gross Domestic Product (3Q)

 

 

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

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