pairs to range trade

Reasonable Doubt In A Broad Reversal In Risk Appetite Sets Up A EURJPY Range

Monday, 08 December 2008 21:09:17 GMT  |  John Kicklighter, Currency Strategist

Risk on / risk off – that is still the primary concern for the currency market and the reason why congestion has dominated price action across the board. A rebound in risk sentiment this morning boosted EURJPY and other risk-sensitive pairs; but is this a reversal or short-term bounce.

Why Would EURJPY Hold A Range?   ·         Levels to Watch: -Range Top:       121.00 (Trend, Fib, SMA, Pivot) -Range Bottom: 116.35 (Range Low)   ·         Beyond just being a driver for the dollar and yen crosses, price action in the currency market seems to be fully engrossed in the health of risk appetite/aversion. Suggestions that the US government was close to a bailout of the its national automakers suggests stimulus efforts will start branching out beyond the impassible financial sector. Scheduled event risk for this pair is minor, with only the German ZEW showing precedence.   ·         Though, with more historical price action in the chart, the EURJPY looks to be set in a much greater bear trend; a short-term chart reflects congestion. Since initiating a short-term bullish breakout this morning, the pair has come upon significant resistance. A falling trendline from Oct 14th, 50% fib, notable pivot and 20-day SMA all fall around 121.00. Suggested Strategy   ·         Short: Entry orders will be set at half size at 120.60, within Monday’s intraday high.   ·         Stop: An initial stop at 121.80 offers a wide enough buffer for a tail, but isn’t too risky. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (120) at 119.40. The second target will be 117.90.

Trading Tip – Risk on / risk off – that is still the primary concern for the currency market and the reason why congestion has dominated price action across the board. A rebound in risk sentiment this morning boosted EURJPY and other risk-sensitive pairs; but is this a reversal or short-term bounce. While there was a broad correction across the markets (currencies, commodities, equities, debt yields and others responded), all of these markets retain their clearly defined trends with very convincing technical levels. Therefore, the probability that this is a temporary move is within a much bigger trend is  far greater than the alternative (the beginnings of a trend reversal). As such, our EURJPY strategy aligns itself to the dominant trend. What’s more, we have adjusted the rules for the setup to allow for the pair’s notorious volatility. By cutting our position size to half and widening the initial stop loss, normal swings near short-term tops won’t accidently whip us out. Finally, though there is little scheduled event risk, we will still cancel all open orders should spot hit 118 first or by Dec 10th.

Event Risk Euro Zone And Japan

Euro Zone – Last week’s ECB rate decision seems to have been the climax of the euro’s economic docket for the first half of this month. Looking at the data scheduled for release over the coming week, there are few indicators on the docket that have proven to be market moving in the past (and fewer that have exhibited the necessary strength to force a breakout from the type of resistance we are now looking at in EURJPY). The primary concern from the docket is also the first release. The German ZEW survey due Tuesday is expected to report fading investor sentiment – not surprising considering the condition of data that continues to cross the wires and the credit crunch’s resiliency despite global rate cuts. Outside of the whims of the calendar, fundamental euro traders will be following any progress to European Union efforts to create a coordinated stimulus response to the regional slump and any comments from central bank members as to what they may do should the benchmark lending reach zero and conditions are still deteriorating.

Japan – Event risk out of Japan is considerable for the coming week; but that is not to mean the calendar will actually have a significant impact on price action. The popular funding currency for the carry trade has long brushed off traditional event risk in favor of risk sentiment; but indicators have been even less important than usual over the past 18 months as the financial and economic crises further temper the appetite for risk. This means that any announcements about a coordinated bailout effort between major economies or signs that stimulus packages are being diverted towards Main Street will easily trump final readings on third quarter GDP or Friday’s consumer confidence report. One indicator that may hold greater promise is the fourth quarter Tankan numbers. As a major manufacturing and export base, speculation over Japanese economic activity going forward may be tweaked by this reading.

Data for December 9 – December 16			Data for December 9 – December 16
Date	European Economic Data		Date	Japanese Economic Data
Dec 9	German ZEW (DEC)		Dec 8	Gross Domestic Product (3Q F)
Dec 12	Euro Zone Industrial Production (OCT)		Dec 9	Leading Index (OCT P)
Dec 15	Euro Zone Employment (3Q)		Dec 12	Consumer Confidence (NOV)
			Dec 14	Tankan Large Mfg Index (4Q)

 

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

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