GBPCHF Looks to Hold its Range by Avoiding Swings in Risk Appetite

Through July, risk appetite has been the indisputable driver for price action in all markets. Whether sentiment is taking a clear trend or adjusting its pace, there have been clear trends borne from this important fundamental catalyst.

[B]Why Would GBPCHF Hold a Range?

         •    Levels to Watch:
         -Range Top:       1.7740 (Fib, Trend)
         -Range Bottom: 1.7475 (Fib, Trend, Pivot)
         •   [/B] In the past three weeks, we have seen a sharp advance in risk appetite and then an abrupt stall as the market waited for fundamental guidance on the underlying driver to take up sentiment’s bearings. However, through all this, GBPCHF has ignored these shifts and developed its own zone of congestion. This divergence suggests both currencies are breaking away from their roles in the risk scheme. Schedule event risk is still an issue.[B]
         •    [/B]Ever since GBPCHF was able to extend its bullish trend channel through a long-term pivot at 1.7475, the market began to struggle with follow through. Since forming a swing reversal high above 1.80 in late June, congestion has been the status quo. Resistance is found in a congestive top around 1.7750; but support is far stronger at this point. [B]
         [I]Suggested Strategy[/I]
         •    [U]Short[/U]: Half-size entry orders will be placed near the top of the recent series of highs at 1.7705.
         •    [U]Stop[/U]: An initial stop of 1.7805 is notionally wide but only covers July’s highs on false breaks. To secure profit, move the stop on the second lot to breakeven when the first target hits.
         •    [U]Target[/U]: The first objective equals risk (100) at 1.7605 and the second target is set to 1.7505. 
                          [B]Trading Tip[/B] – [B]Through July, [risk appetite has been the indisputable driver for price action]( in all markets. Whether sentiment is taking a clear trend or adjusting its pace, there have been clear trends borne from this important fundamental catalyst. However, through the surge in equities and yen crosses through the first half of this month and the subsequent stall this past week, GBPCHF has maintained its general congestion. Though this pair is comprised of two currencies that have historically been considered risk reactive, both the franc and pound have seen their roles shift thanks to notable changes in risk appetite, economic activity, financial health and their function in global investment schemes. With the United Kingdom maintaining a very low benchmark rate and suffering from a comparatively extended recession while Switzerland comes under pressure for its renowned banking secrecy laws, we have seen the traditional carry trade and safety features of this pair blur. This could help the pair weather moderately intense changes in risk trends – a considerable risk in these markets. For strategy, our entry, stop and objectives are all carefully placed as our range is limited and in fact closing. If a breakout is not forced through sentiment, it could be through building scheduled event risk. Therefore, we will cancel all open orders by Thursday. 


[B]Event Risk for UK and Switzerland[/B]

[B]UK – [/B]The British pound still generally falls under the category of a high risk currency. However, no longer is this necessarily due to its yields (which are now established on a sparse 0.50 percent benchmark), but more owing to the country’s struggle to pull itself out of recession and stabilize is credit markets. It will be imperative going forward to monitor the link between the currency and market sentiment since shifts in market forecasts have been dramatic and all-encompassing. In this regard, the Bank of England policy gathering scheduled for later next week could signal what the central bank is forecasting for timing on an economic recovery and whether they will expand their policy efforts through bond purchases (a hotly debated consideration). Outside of this broad theme, event risk over the coming week is consistent and potentially market-moving. Public debt and mortgage applications data will gauge efforts to improve the availability of funds to consumers and small businesses to facilitate a recovery. Consumer confidence will be a common theme as well; but it is the PMI figures (manufacturing, services and construction) that will offer leading bead on economic activity.[B]

Switzerland – [/B]Is the Swiss franc still considered a safe haven? This currency has been hailed for a comparatively low benchmark lending rate (which is particularly important for carry traders looking to take advantage of the European spread) and is backed by an economy known for its banking secrecy laws. Conditions have changed over the past six to 18 months however. Now, most liquid countries have excessively low yields. More importantly, foreign governments have begun threatening sanctions on Switzerland if is done not open its books to reveal potential tax evaders. This, along with the constant threat of SNB intervention, makes the franc a fundamental unknown. As for economic data, the KOF leading composite, SVME –PMI and inflation figures take a back seat.