False breakouts and volatility have been the scourge of range strategies these past few weeks. Individual currencies, as well as general market themes (like risk appetite), have been unable to spark a clear and tradable rallies. At the same time, congestion has been choppy and frequently overruns technical boundaries.
[B]GBP/CHF – The Pair to Short-Term Range Trade[/B]
[B]Why Would GBPCHF Hold a Range?[/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.7500 (Trend, SMA, Pivot, Fib)[/B][B]
-Range Bottom: 1.6650 (Trend, SMA, Fibs)[/B]
· Under normal circumstances, risk appetite would be considered the primary driver for GBPCHF. Even so, the benign yield differential the pair carries and dour outlook for the UK economy work to dampen the market’s response to the high level of volatility that has been developed through market-wide sentiment has produced recently. On the other hand, things will not be quiet. A BoE rate decision and Swiss GDP release could supply breakout potential.
· Like many of the other franc and yen-based pairs, GBPCHF has pushed through moderate technical levels recently and subsequently lost its drive. However, these false breaks have occurred within the bounds of far more influential technical levels. Most notably, resistance at 1.75 is buffered by a long-term trend, serious pivot and the 200-day SMA.
[B][I]Suggested Strategy[/I][/B]
· [B][U]Short[/U][/B][B]: Half-sized (or smaller) entry orders will be placed at 1.7375, which is significant buffer.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 1.7575 will not cover a false breakout initiated close to resistance. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (200) at 1.7175 and the second[/B][B] target will be 1.6925. [/B]
[B]Trading Tip[/B][B] – [/B]False breakouts and volatility have been the scourge of range strategies these past few weeks. Individual currencies, as well as general market themes (like risk appetite), have been unable to spark a clear and tradable rallies. At the same time, congestion has been choppy and frequently overruns technical boundaries. For GBPCHF, the same chop was recorded; but in the commotion, the pair would ultimately bend to far greater technical levels. Our immediate concern is in resistance around 1.75. Defined by a seven-month pivot level, an 18-month trendline, remarkable 50% Fib retracement and 200-day moving average. This is a significant ceiling; but our strategy must account for the high level of volatility this pair experiences on a regular basis. Our entry is set well enough below the key level; but considering the stop we have to place, this leverages our risk. Therefore, we will cut our position size by at least half to maintain a reasonable level of risk. Considering the average daily range this pair experiences, the first target can be hit quickly after entry; which could lead chop to knock our second half out at break even before a decline really builds momentum. This isn’t too big a concern however as reducing risk is most important. And, though we are dealing with wide stops and targets, we expect this position to play out relatively quickly. As such, we will cancel any open orders by Wednesday or should spot hit 1.70 before we are entered.
[B]Event Risk for UK and Switzerland[/B]
[B]UK –[/B] In recent weeks, the British pound has taken up a distinct correlation to risk appetite. However, despite the dour prospects for Europe’s second largest economy and the ongoing financial crisis it is suffering, the sterling has climbed as optimism rises. This suggests the market considers the currency oversold as it has been hammered over the past year and a half as a once high-yielding center for speculation has fallen to the opposite extreme. We are still a long ways away from seeing growth and interest rates rebound; but that is what fundamental speculators will latch on to. From a growth perspective, the factor and service sector activity gauges, credit and mortgage approvals data will help guide expectations. It will be the rate decision however that is the real driver for volatility. While the MPC is expected to hold the benchmark, their forecasts and quantitative easing efforts will speak volumes about future decisions.
[B]Switzerland – [/B]Typically, the Swiss franc is the product of cross fundamental influences. Things may change a little bit next week though as the docket fills out with notable event risk. Offering significant influence on longer-term economic trends, the SVME PMI figure for May will gauge factory health; the unemployment rate will benchmark consumer spending expectations; and consumer-based inflation will offer a sense of spending through the sense of cost. The real yardstick for economic health however comes early in the week with the 1Q GDP number. This is the first and only reading for this economy and the forecast is wide – which means reactions to surprises are almost assured. Should event risk not take over the market however, it will be important to follow the trend of general risk appetite. The SNB’s intervention has changed the game somewhat; but the currency is still considered a safe haven.
[B]Data for June 1 – June 8[/B]
[B][/B]
[B]Data for June 1 – June 8[/B]
[B]Date (GMT)[/B]
[B]UK Economic Data[/B]
[B][/B]
[B]Date (GMT)[/B]
[B]Swiss Economic Data[/B]
Jun 1
PMI Manufacturing (MAY)
[B][/B]
Jun 2
GDP (1Q)
Jun 2
Net Consumer Credit (APR)
[B][/B]
Jun 2
SVME-PMI (MAY)
Jun 3
PMI Services (MAY)
[B][/B]
Jun 5
CPI (MAY)
Jun 4
BoE Rate Decision
[B][/B]
Jun 8
Unemployment Rate (MAY)