Volatility Less Of A Threat For A US Dollar / Swiss Franc (USDCHF) Range Trade

 Range trading is a dangerous strategy with the currency market as volatile as it has been recently. As such, our USDCHF setup should come with specific conditions. First, we have laid out a strategy that has a tight stop, strong entry and reasonable targets.

Why Would USDCHF Stay in a Range?

 

·         Levels to Watch:

-Range Top:       1.1490 (Swing High)

-Range Bottom: 1.1225 (38.2% Fib, Range Low)

 

·         The entire currency market is tied up in the ongoing financial crisis. Indeed, the coordinated rate cut yesterday leveraged volatility and sent the carry trade tumbling as risk and return were adversely effected. However, USDCHF is unique in that the appeal of the US dollar for safe haven flows (thanks to Treasuries) helps to offset the moderate carry in the pair. If volatility cools as expected after this move, USDCHF will be left to technicals.

 

·         Volatility is the most important element for trading this pair. Significant technicals are relatively well defined. Support (our primary level) is called up on a triple bottom that has developed around the 38.2% retracement of the 9/29 to 10/7 swing high at 1.1225. The swing high at 1.1490 is minor, while a long-term trend falling at 1.1635 is more stable.

Suggested Strategy

 

·         Long: A limit order on two lots at 1.1250 is close to support while still being within reach.

·         Stop: An initial stop at 1.1195 is well below support but modest considering recent volatility. When the first target hits, the second stop will be trailed to breakeven.

·         Target: The first target will equal risk (55pips) at 1.1305. Second objective is 1.1365.

Trading Tip – Range trading is a dangerous strategy with the currency market as volatile as it has been recently. As such, our USDCHF setup should come with specific conditions. First, we have laid out a strategy that has a tight stop, strong entry and reasonable targets. Furthermore, it is important to realize in markets like these, conditions can change quickly, so standing orders for any kind of range trade should expire soon. Therefore, we will take our orders off before Friday’s close. Another promising element of this trade is that it holds with the dominate trend. On the other hand, the charts are starting to look more like a head and shoulders formation. To make sure the pattern doesn’t break the neck line and take us out on an impromptu entry, we will also cancel standing orders if spot hits 1.14 before our entry levels are reached.

Event Risk US and Switzerland

US – There are a few economic indicators scheduled for release over the coming week, but their influence on the market will be minimal if the market is more concerned with the progress of the financial crisis. The most important fundamental influence on the dollar for the foreseeable future is the level of demand for liquidity and aversion to risk. As long as the credit market is frozen, capital will flow to Treasuries; otherwise, the cumulative impact of the bailout effort,rate cut and oncoming recession could pull the currency down. Aside from this ebb and flow, a few specific indicators could offer a trigger to price action. University of Michigan and retail sales figures will offer a view on the recession – though this hasn’t found a significant following from the market recently. The CPI numbers on the other hand can feed directly into Fed rate expectations; and with a meeting scheduled for the 29th, this can find particular interest.

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.

Data for October 10 – October 17

 

Data for October 10 – October 17

Date

US Economic Data

 

Date

Swiss Economic Data

Oct 10

Trade Balance (AUG)

 

Oct 10

Unemployment Rate (SEP)

Oct 15

Producer Price Index (SEP)

 

Oct 16

Retail Sales (Real) (AUG)

Oct 15

Retail Sales (SEP)

 

Oct 16

ZEW Survey (Expectations) (OCT)

Oct 16

Consumer Price Index (SEP)

 

 

 

Oct 17

U. of Michigan Confidence (OCT P)

 

 

 

 

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