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There are few – if any – viable range trades in the currency market as panic has generated volatility in every corner. Therefore, in looking for a pair with some level of stability, I have come across CHFJPY.

Why Would CHFJPY Stay in a Range? • Levels to Watch: -Range Top:       90.20 (Trend, 50% Fib) -Range Bottom: 87.20 (Temporary Range Low) • There are few – if any – viable range trades in the currency market as panic has generated volatility in every corner. Therefore, in looking for a pair with some level of stability, I have come across CHFJPY. This pair is made up of the two most prominent funding currencies, so there is some buffer to the unpredictable flux of risk. At the same time, there has been a clear trend in this pair as risk aversion is still looking to move against all carry for safety. • Technically, this pair is in a larger downtrend. Recently, however, the pair has turned to messy congestion. Support is more difficult to call around tails that fall between 86.50/87.25 with no long-term levels to give it any real strength. For resistance, a short-term falling trendline and 50% fib (of the 10/3 to 10/10 swing) have shown some influence. Suggested Strategy • Short: A limit order on two lots at 90 is difficult to achieve but necessary considering risk. • Stop: An initial stop should be well above the range of highs around 90.50. When the first lot takes profit, we will move the stop on the second lot to breakeven. • Target: The first objective should be equal to risk at 89.50. The second will be set at 88.25

Trading Tip – The best advice for these types of markets is to steer clear of range trading. Volatility in the currency market has surged to recent record highs while breakouts and trends are prevalent. Looking ahead, the CHFJPY’s range looks like it could easily fall. If risk is still driving price action, this pair can break support. On the other hand, a rebound in confidence may mean a deep retracement of the CHFJPY decline over these past few weeks. For those looking for a short-term range position though, this pair has a natural (albeit slight) buffer to risk consideration. Sticking with the higher trend (bearish) raises the probability of success. If this strategy is pursued, it should be considered with extra caution. Don’t use limit orders and watch price action on the open to ensure there is no immediate breakout. Also, considering how volatile even the fundamentals are, market conditions can change quickly, so this strategy should only be considered through Tuesday.

Event Risk Switzerland And Japan

Switzerland – Traditionally, Swiss economic data has little to no impact on the franc’s price action. This will certainly be the case with the market more caught up in risk and interest rates. Carry trade flows will be a primary driver for the week ahead. As this pair has been artificially floated by demand for Treasuries, a rebound in carry will naturally help this modest carry trade (a 100 basis point differential between the average benchmark lending rates). On the other hand, exit from US government debt will in turn follow a rebound in risk appetite. We will keep an eye on the data that is due over the coming week, but primarily because it will reflect the impact of the financial crisis on growth and could determine whether or not a recession is in store for Switzerland.

Japan – While the Swiss franc is a funding currency in the carry trade itself, the swissie and Japanese yen are on different ends of the risk spectrum when risk is in the type of heightened state it has been in recently. Data is completely irrelevant; and the Japanese currency will find its direction almost exclusively from the level of risk appetite in the market. This weekend, the G7 will offer a more detailed plan for what they plan to do in order to stabilize the global markets; and the market will judge whether their efforts can actually plug the dam.

Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.