AUDCHF Range Must Override Risk Appetite, SNB Warnings

A substantial wave in activity has severely altered the pace and trajectory of the British pound and given the dollar some room for a slow recovery against the majors. This has led to a varied and technically sensitive market.

How stable is the AUDCHF Range?
Levels to Watch:
-Range Top: 0.9075 (Range High)
-Range Bottom: 0.8900 (Fibs, Pivot, Trend SMA)

• There is little doubt that AUDCHF has connections to risk appetite. The Australian dollar is the avowed benchmark for the high-yield crowd and the Swiss franc maintains one of the lowest interest rates (market and interbank) amongst the most liquid financial centers. This translates into a pair that is highly sensitive to shifts in risk appetite. As for scheduled event risk. The RBA and Treasury speeches at the Senate can alter rate forecasts.
• Through the long-term (since the beginning of the year), there is a bullish bias behind the market. Recently, progress has stalled and zones of price action have developed. We are currently between the August swing high and a dense support (Fib, trend, SMA, pivot) around 0.89. However, a short-term trend could push the market down to 0.88.
Suggested Strategy
Long: Considering the low volatility and narrow range of this pair, a 0.8905 entry is reasonable.
Stop: The confluence of support and low level of activity means a tight stop of 0.8865 is sensible. To secure profit, move the stop on the second lot to breakeven when the first target hits.
Target: The first objective is one and a half times initial risk (60) at 0.8965. The second is 0.9030.
Trading TipA substantial wave in activity has severely altered the pace and trajectory of the British pound and given the dollar some room for a slow recovery against the majors. This has led to a varied and technically sensitive market. Generally, most range setups are already underway or otherwise a high breakout risk. Our AUDCHF setup carries its own technical and fundamental concerns. First and foremost, we already have exposure to the Aussie dollar from yesterday’s AUDNZD strategy. Beyond this, we have to be constantly on top of risk trends. A pair that pairs well-known high- and low-yielding currencies will be undoubtedly sensitive to heady moves in investor sentiment. If we indeed see a steep correction or sharp continuation in risk appetite (which can be gauged in anything from the carry basket to equities); it could easily be played out in this cross. As for the strategy itself, both our entry and initial stop are aggressive – reasonable and necessary with a pair that has exhibited low volatility recently while carving a smaller range. Entry is very near today’s low and subsequently support; and since this technical floor is relatively dense, we want to cover a modest tail on a reversal and little more. A push below 0.89 will likely head to the next major pivot at 0.88. Timing is also an issue with the market still dealing with high volatility. We will cancel all open orders by tomorrow.

Event Risk for Australia and Switzerland
Australia Bullish sentiment behind the Australian dollar has been dampened by the Reserve Bank of Australia’s efforts to temper its forecast – which is then interpreted by speculators as its rate bias – over recent months. The Australian economy has been able to avoid the black mark of economic recession; and naturally, a yield-hungry market expects the economy to front run the broader recovery. However, the central bank has echoed the same concern that its counterparts the world over have noted: that the global growth going forward will be restrained and uneven. If it were the case that the world-wide recovery were ‘V’ shaped, the impact on exports and demand for yield would send Australia ahead of the pack; but a strained rebound will more likely moderate growth potential for the land down under as it slowly bolsters those that suffered significant recessions. This is the concern to be kept in mind with the round of official commentary due over the coming week. The RBA already released its Financial Stability Review; but next week we will see both the central bank and Treasury represented at the Senate.

Switzerland – The Swiss franc has rallied against many of its counterparts recently; but the progress that will be most closely watched is in EURCHF. The SNB’s vows to prevent their currency from appreciating have referenced this pair specifically as the Euro Zone is the small economy’s largest trade partner. As the franc appreciations, the smothering effect on the franc encourages intervention from the central bank; and more importantly, it leads to speculation of manipulation. Until these fears are realized or banished, we will have a heavy flow of data to include the KOF growth forecast, UBS consumer spending gauge and SVME business sentiment report.

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? You can send them to John at <[email protected]>.