USDCHF A Good Range Trade In Recent High Volatility Conditions

There is a lot of congestion in the currency market. However, these impromptu ranges come under rising volatility and at the end of significant rallies – hence we must be very cautious in picking our range trades.

 

Why Would USDCHF Stay in a Range?

 

·         Levels to Watch:

-Range Top:       1.1500 (Fib, Short Rang High)

-Range Bottom: 1.1210 (Trend, Range Low)

 

·         We were looking at USDCHF as a range trade candidate this past Monday, but before our limits would have been hit, our orders expired. Since last looking at this pair, the levels of congestion have merely solidified – an interesting element of this pair considering the significant increase in risk aversion over the past 24 hours. This may be the case as both the US and Swiss currencies are considered safe havens in times of uncertainty.

 

·         From the charts, the range extremes seem far clearer than they were on Monday. Resistance at 1.15 stood up for a second swing around the big 50% fib (confirming the market wouldn’t merely target the major trendline at 1.1650. Support is of primary interest now considering spot. A range low is shaky, but an SMA and rising trend shore it up.   

Suggested Strategy

 

·         Long: Considering the false breaks, we will have an aggressive entry at 1.1230.

·         Stop: An initial stop down at 1.1175 will secure against bearish momentum, but not a false breakout. After the first target has been hit, we will trail the second lot’s stop to breakeven.

·         Target: The initial target will equal risk (55) at 1.1285. The next objective will be 1.1365.

Trading Tip – There is a lot of congestion in the currency market. However, these impromptu ranges come under rising volatility and at the end of significant rallies – hence we must be very cautious in picking our range trades. Fundamentally, USDCHF is buffered from risk as both currencies are bought during times of uncertainty and there is little in the way of yield differential for carry to take the reins. On the other hand, while this pair has held well to a general range, the extremes are less than exact. Volatility has led to frequent, false breaks that can easily trip stops on relatively tight stops that must be used to hold risk/reward considering the size of the range. Our entry above 1.12 may be too aggressive (as a short-term rising trend could curb declines to 1.1285) and may never be triggered until a breakdown. At the same time, it also may be too close considering the false break from last week. We will keep the orders on this strategy open until Friday. We do not want to have a potentially volatile weekend to give us a bad fill and/or whip us out.

Event Risk US And Switzerland

US – Risk appetite is starting to swell once again in the global markets and the US dollar is once again positioned as the best option for liquidity – even if the country’s assets are under bearish control and the economy is heading towards a recession. Aside from market sentiment’s impact on price action, the currency will show a greater sensitivity to economic data that crosses the wires. With a recession already expected, fundamental traders will now speculate on whether the downturn will be short-lived and shallow or drawn out and crippling. Data coming out over the next week will have a mixed influence on this ongoing assessment. Most of the higher level data is concentrated on housing – a sector that economists and traders already know to be steeped into a recession. However, as other sectors cool, persistent drops in home values will merely leverage expectations for the worst. Consumer spending is in the lynch pin for the economy. The University of Michigan’s gauge will offer the first true measure of sentiment through an ongoing market crash.

Switzerland – Like the US dollar, the Swiss franc is considered a harbor from uncertainty and general risk. However, appeal of this currency as a reserve for capital is questionable when it comes to liquidity when compared to the greenback. A relatively new driver for price action is interest rate expectation. Before last week’s unexpected rate cut from the SNB, monetary policy officials were expected to hold to their neutral bias perhaps until the first quarter of 2009 when volatility in global inflation and growth would settle and offer the typically patient central bank a better outlook for the medium term. That passivity has shifted though with the rate and growth outlook now weighing heavy. This interest may leverage the market moving capabilities of the 3Q housing and September money supply data.

Data for October 17 – October 24

 

Data for October 17 – October 24

Date

US Economic Data

 

Date

Swiss Economic Data

Oct 17

Housing Starts (SEP)

 

Oct 21

Trade Balance (SEP)

Oct 17

U. of Mich. Consumer Confidence (OCT)

 

Oct 21

Real Estate Index (3Q)

Oct 23

House Price Index (AUG)

 

Oct 21

Money Supply M3 (SEP)

Oct 24

Existing Home Sales (SEP)

 

 

 

 

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