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Volatility and False Breaks Define the FX Market Ahead of the EU Stress Test Results

Volatility and False Breaks Define the FX Market Ahead of the EU Stress Test Results

2010-07-22 16:42:00
John Kicklighter, Chief Currency Strategist
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The countdown is winding down. Tomorrow, we have the last gasp of big event risk that will define both growth expectations (with the UK 2Q GDP release) and more importantly, risk appetite trends (through the EU Stress Test Results). This is a round of events that will cover the entire market; so there are very few pairs that could be expected to avoid risk all together. For this reason, we should be looking to pairs that are setting up to substantial trends, breakouts or reversals rather than those that are already underway. Most important of all, it is important to avoid taking any freshly developed moves just before the release. While you can come out on the right side of the event risk; you could just as certainly be on the wrong side and see a position that was supposed to last for a little while and offer a sizable return force you out for a large loss almost immediately. Those are odds I like to avoid. That being said, I do modest exposure going into the release. It is relatively limited though; and I will remain flexible. Ultimately, we may not have an opportunity to take a new trade until Monday given the late release of the EU report; but it is better to wait a little bit for a good trade rather than force a bad one.

For my book, there are only three open. One trade is still in the money and has a stop set at breakeven. Currently, AUDCHF is struggling with very consistent resistance set at 0.9325 which gives good enough distance from my stop at 0.9415 to allow this to play out into a possible risk aversion trend. For my USDJPY long interest, I'm still in a small size position and I am looking for a much longer term and am therefore able to survive short-term volatility. That being said, a demand for a safe haven or yield will put the dollar in the driver's seat regardless. Finally there is my CHFJPY short. My only remaining full-size position, this one lost all momentum after putting in for a trend channel break and reversal. A stop at 84.60 offers room to work and this pair is not highly sensitive to risk trends; but it is enough to push risk above what I like.

The real interest now comes in potential trades. There are plenty of them. EURUSD is at the top of this list with 1.30 closer now than it was at yesterday's close. A truly positive outcome could overwhelm this level and there are few resistance levels above that. Alternatively, a reversal would be easy to accomplish after the past two months' run. For a straightforward risk appetite outcome, I like EURJPY on a break of 113.25/50. GBPUSD is another pair that could go both ways. A rising trend channel can encourage continuation or offer momentum in a potential reversal. Another major to add to the list is USDCHF. An exaggerated range bottom at 1.04 is begging for resolution. A similar long-term support is found in GBPCHF at 1.5850. CADJPY has a rising trendline as a consistent floor. All of these are high potential opportunities. These will be our trades for next week.

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