The demand for yield has once again soared and the currency market has responded in kind. Rallies from high-yielding currencies and plunges from those sporting a low benchmark have sent most of the market to short-term breakouts and back into short-term trends.
How stable is the EURCHF Range?
• Levels to Watch:
-Range Top: 1.5230 (Range, Pivot, Fibs)
-Range Bottom: 1.5075 (Range, Fib, SMA)
• Risk appetite has once again taken off this week; but it is less the direction the market has taken with this underlying driver but rather the volatility it has supplied that is worrisome. With a more wide-angled view of market sentiment, we can see that the dominant trend since the financial crisis stalled is itself turning to congestion. A trend revival may be in the works; but EURCHF is one of a few pairs that can weather the storm. But can it weather the ECB?
• Few pairs are as renowned for congestion as EURCHF. However, the range that has developed over the past month-and-a-half is ill-defined. Though there has been a trend of lower lows through September, we have seen a floor develop with Fib confluence around 1.5075. Resistance has been frequented (but less often recently) at 1.5230.
Suggested Strategy
• Long: Setting entry at 1.5085 is very aggressive but well within reason even with the spread.
• Stop: The limited range on EURCHF means a tight stop of 1.5045 is still reasonable. 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 risk (60) at 1.5145. The second is 1.5185. Trading Tip – The demand for yield has once again soared and the currency market has responded in kind. Rallies from high-yielding currencies and plunges from those sporting a low benchmark have sent most of the market to short-term breakouts and back into short-term trends. However, this shift is far from confirmation of a new direction for FX and the other asset classes. We have seen many swings in the recent past that have promised action but ultimately faltered with time. This makes for frustrating trading as setups for both ranges and trends ultimately fall to the directionless volatility and immediate reversals. These are not the conditions to develop normal range-based strategies. To improve our chances, we have to look for short-term setups, those pairs that are fundamentally disconnected from risk-based activity, or very solid technical developments. There are few opportunities that meet any of these three scenarios; but EURCHF at least fulfills the fundamental requirement. While all currencies fit somewhere on the market’s tacit risk spectrum, some pairs are buffered to the rising and falling of sentiment by deep economic ties. The close dependence of the Swiss economy on the broader Euro Zone (as well as the more or less coordinated policy efforts) establishes a semi-permanent state of congestion for the pair. There are certainly biases that develop within this chop and sharp responses to unforeseen SNB intervention; but there are is a general pattern to follow. Our setup looks to take advantage of the range low that has developed over the past two weeks with an aggressive entry and a tight stop that this pair can easily support. The long bias is purposefully aligned to potential intervention; but even if the central bank doesn’t act, the first target is still within reach. We will cancel open orders in a week.
Event Risk for the Euro Zone and Switzerland
Euro Zone – Among a range of currencies that have been highly sensitive to the underlying influence of risk appetite, the euro has notably held its own against otherwise dramatic moves. However, this has not prevented the currency from acting as the counterpoint to more responsive currencies. This will likely be the general pace of fundamentals for the world’s second most liquid currency over the coming days and weeks. However, there is notable event risk to account for along the way. Most notable on the docket is Thursday’s ECB rate decision. The central bankers have made a valiant and successful effort to squash speculation of a near-term revival of hawkish monetary policy. Nonetheless, after the RBA’s unexpected hike this week; the market will assume the path has been cleared for those economies well into their recovery. As confirmation of the Euro Zone’s economic rebound, the final 2Q GDP data is due the day before. More timely indicators like German factory activity and investor sentiment will be better for short-term volatility.
Switzerland – We are coming to the end of an active period for the Swiss economic docket; and the added stability will inadvertently assure the currency is focused on trends in risk appetite. There are only a few notable economic releases due in the course of the coming week; but only the unemployment data is worth mention. With exports struggling, domestic consumption is even more vital.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
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