EURCHF Range Looks To Weather Market-Wide Volatility

Why Would EURCHF Hold a Range?   ·         Levels to Watch: -Range Top:       1.5140 (Pivot, Fib) -Range Bottom: 1.4650 (Swing Low)   ·         Volatility is high across the currency market and there is a standoff behind a potential reversal in many of the most liquid euro and swissie currency pairs. These conditions are certainly not supportive of general range trades. On the other hand, EURCHF looks to isolate some of this risk. This pair is made of up two currencies whose economies are closely tied. What’s more, interest rate risk is minimal and general risk exposure is modest.   ·         From a technical perspective, the setup behind this pair is relatively weak. However, resistance read in the frequented pivot level around 1.5125/50 will naturally stand as a point of inflection for market bulls that frequent this pair. Add to this, the presence of a Fib confluence between 1.51000/20 and there is notable overhead resistance.   Suggested Strategy   ·         Short: Half-sized entry orders will be set at 1.5100 which is well below the pivot.   ·         Stop: An initial stop at 1.5200 should cover the zone of resistance under mild volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (100) at 1.5000. The second is more aggressive at 1.4840.

Trading Tip – Market conditions are generally non-conducive to range trading. Volatility is still excessively high and many of the market’s most liquid pairings are subject to either significant breakouts or sharp reversals. To help minimize this risk, we turn our focus to EURCHF which is experiencing congestion and is comprised of currencies that are close fundamental cousins. On the other hand, there is still significant exposure to the ebb and flow of general risk sentiment as the franc is considered one of the primary safe havens for the currency market. In this respect, this EURCHF setup is an extension of the EURUSD position from Friday. To help minimize the broad threat to range conditions, our strategy first looks to reduce positions size (we are looking at half sized, but further reductions are reasonable). Furthermore, our suggested stop is wide enough to cover modest tails that may occur near our range top; and this further sets up a first target that is easily reached. To further reduce exposure to event risk from the economic calendar, we will cancel any open orders by Wednesday or should spot hit 1.4925 before we are entered.

Event Risk Euro Zone And Switzerland

Euro Zone – Is the Euro Zone in a fundamentally better position to weather the global recession than the US or UK? This is a broad question that will guide the underlying trend behind the euro for some time to come. If we had asked the same question a year ago, the market’s answer would be a resounding yes followed by suggestions that the euro would replace the US dollar as the world’s reserve currency. Now, however, this sentiment has changed. The stability of the union has been strained by financial crisis, efforts to stimulate domestic economies, government interference and sovereign rating downgrades. More overwhelming though may be the lack of growth in individual member nations and the region as a whole. Speculation over how long and severe recessions will be has become the key for evaluating a currency’s strength. Over the coming week, there will be considerable fuel to stoke such speculation.  Building up through the week, we will see readings of both consumer (GfK) and business (IFO) confidence for German to gauge spending. Employment figures and inflation data are both notable market movers and further key to determining whether the ECB will reach zero.

Switzerland – Like the US dollar, the Swiss franc’s primary driver is risk sentiment. Considering the SNB has lowered rates to near-zero and Switzerland has long been a safe haven for assets, the Swissie will always respond to any unforeseen shifts in sentiment. It is difficult to foretell what event may trigger a market shock, though the US GDP report scheduled for Friday is large enough to send concerns of risk / reward throughout the FX market and beyond. Locally, there is substantial event risk populating the Swiss docket. Over the next two days we will receive indicators on consumer spending habits and the general pace of growth through Jan. These are notable readings, but not known market movers. 

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