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USDCHF Offers A Short-Term Range Opportunity If Played Correctly

Monday, 27 October 2008 20:27:18 GMT  |  John Kicklighter, Currency Strategist

As we have warned for the past few weeks, it is extremely dangerous to look for range trades in current market conditions. However, if we were to look for a potential setup with legitimate fundamental and technical support, USDCHF fits the bill as the best candidate.

Why Would AUDNZD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.1750 (Trend, Fib) -Range Bottom: 1.150 (Trend, Pivot)   ·         The sudden jump in volatility across the currency market this morning has forced short-term ranges into breakouts. However, frustratingly enough, this dramatic increase in price action hasn’t actually revived major trends. Clearly, in these conditions, it is highly dangerous to take any kind of trade that relies on congestion and low volatility. However, one of the few pairs that can be expected to hold remains USDCHF, which is comprised of two carry and safe haven currencies.   ·         Today’s price action mimicked the activity seen through Friday. This is a good sign for the USDCHF range as it precisely confirms the strength of the 1.1750-1.15 congestion zone. Support is our main focus with a rising trend and pivot. Resistance is just as sturdy in a six year falling trendline though. Suggested Strategy   ·         Long: Entry at 1.1515 is well within the limits of the range from the past two days.   ·         Stop: An initial stop at 1.1455 offers a buffer over the recent lows seen from the past few days. Securing profit, the second lot’s stop will be moved to breakeven when first target is hit. ·         Target: The first objective equals risk (60) at 1.1575. The second target will be 1.1645.

Trading Tip – As we have warned for the past few weeks, it is extremely dangerous to look for range trades in current market conditions. However, if we were to look for a potential setup with legitimate fundamental and technical support, USDCHF fits the bill as the best candidate. Fundamentally, this is one of the few pairs that offers some sort of a buffer to the remarkable and frequent explosions in volatility that we have seen lately. Though it certainly isn’t a perfect correlation (as is obvious from the general trend in price action), both the dollar and franc are well-known safe havens and now they share the role of well-bought carry currencies. From a technical point of view, the range we point out above is carved out by two notable trends with additional backup. And, while the falling trendline that establishes resistance is far more established, our suggested strategy holds with the prevailing trend in the event of a breakout. Regardless of what we can find to support price congestion, capital preservation is our first concern. As such, we will not short this range, we will close all limit orders should the pair hit 1.1685 before we are entered, and we will cancel all open orders before Wednesday’s Fed decision.

Event Risk US And Switzerland

US – Though traders have been and continue to be guided by the level of risk aversion in the currency market, there is little doubt that the dollar will respond to the major US event risk scheduled to cross the wires over the coming week. The first major release is Wednesday’s FOMC rate decision. This is the group’s first meeting since the coordinated rate cut a few weeks ago when the policy makers voted to lower the benchmark to its current 1.50 percent standing. The markets are now fully pricing in another half a percent cut and showing considerable expectations of a 75 percent move to jump-start lending. Such a move would certainly change the perception of the US dollar. The other key event for the week is the first measure of 3Q GDP. Monthly data has long ago encouraged speculation that the growth contracted through the three-month period, but confirmation will go a long way towards altering forecasts for the greenback. What’s more, coming from the world’s largest economy, this growth figure will guide expectations of global growth.

Switzerland – The docket for the week ahead is far more populated by notable economic indicators than usual; but the franc will likely hold its interest in risk trends. As a key carry currency and a traditional safe haven for capital during rough market conditions, investors will continue to treat the franc as a risk-free asset. Should panic continue its spread, investors will transfer funds into Swiss bank account (though we also have to consider the perception of liquidity – in which the US dollar trumps the franc). For scheduled event risk, consumer spending, manufacturing activity and the leading indicators composite will give a good overview on the growth outlook. October CPI will measure the SNB’s scope for following the ECB in lower interest rates at the next meeting.  

Data for October 28 – November 4			Data for October 28 – November 4
Date	US Economic Data		Date	Swiss Economic Data
Oct 28	Consumer Confidence (OCT)		Oct 28	UBS Consumption Indicator (SEP)
Oct 29	FOMC Rate Decision		Oct 31	KOF Leading Indicator (OCT)
Oct 30	GDP (3Q A)		Oct 3	SVME PMI (OCT)
Nov 3	ISM Manufacturing (OCT)		Oct 4	CPI (OCT)

 

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.

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