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High Volatiity and No Direction Equals High Risk for Medium-Term Traders

High Volatiity and No Direction Equals High Risk for Medium-Term Traders

2010-07-20 16:25:00
John Kicklighter, Chief Currency Strategist
While I don't categorize myself as a trader for any specific time frame (short-term scalping, medium-term swing trades or long-term positions), I my normal time frame makes it a risky venture to take new trades this week. The problem with taking trades that are meant to least three days to a week is that there is big ticket event risk due on Friday (when liquidity drains) which acts like a cloud over price action and works to prevent the development of a clear trend. Just think of it, would you take a large trade before high level event risk that could drive the market's sharply against you? No. And, deeper pockets won't do it either. Instead, we have broad congestion that is warped by high volatility with key event risk. For risk trends, the move towards pessimism seemed to begin between the Asian and European hours; but there would be a specific catalyst in the round of debt sales from European governments. I think the entire region is suffering under high yields and questionable demand; but the crowd seems to believe the Spanish and Irish sales went pretty well. The Greek auction was far more shaky; but it was the Hungarian sale that was really concerning. For more currency specific movements: speculation that the BoJ intervened drove the yen counter risk appetite trends; the RBA's minutes fueled doubt over future policy efforts; the UK public borrowing data undermined the effort to coordinate growth and fiscal health; and the BoC has unofficially deferred the pace of future rate hikes.

Given the unusually high level of volatility and general hold on sentiment-based trends, my positioning was mixed through the day. The sharp drop in the yen on the BoJ speculation has benefit my USDJPY long position; but I would have rather seen a rally from the single currency to drive my CHFJPY short lower. Given my time frame for the latter is shorter and targets nearer, and I am in small size with USDJPY for a much longer haul, the reasoning for my preference should be clear. Interestingly enough, neither the discouraging minutes nor a general move towards risk aversion would help out my AUDCHF short.

Given my assessment of uncertainty, my list of potential positions has been whittled down. Though I would not trade it unless under ideal conditions, EURUSD is nevertheless an important pair to watch around 1.30 into the end of the week. That being said, the first opportunity to really take a position should be on Monday (provided we are given a good reading). All things considered, I think EURUSD will eventually revive its bear trend; but for an offset to this exposure, a bullish break from EURJPY above 112.75 still looks tempting. On the Aussie-side, I'm still keeping an eye on AUDCAD and AUDNZD - though the former has broken above 0.92. Finally, CADJPY has once again held its long-term rising trend support; but that may not hold for long.

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