Rise in risk appetite may have lost its momentum; but it has yet to be put off its pace. Looking for ranges (much less reversals) for those securities that have a close bond to the whiles of sentiment is a dangerous prospect.
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[/B] How stable is the AUDUSD Range?
• Levels to Watch:
-Range Top: 0.8760 (Range High)
-Range Bottom: 0.8585 (Trend, SMA, Fibs)
• Most of the market’s risk-forward securities have turned to congestion over the past few weeks; and this has naturally lent AUDUSD a level of stability as well. Over the past few days, we have heard hawkish commentary from Australian policy officials but specific event risk to alter growth or interest rate expectations for either currency aside from this has been limited. The most threatening event to spell a potential breakout is this Friday’s NFPs.
• This pair has been confined to congestion for more than three weeks now; but a range at the extreme of such a prolific trend doesn’t endure for long. The trading zone between 0.8760/75 and 0.8585 is just wide enough that an active session can tag both boundaries. The natural bias behind this pair is bullish; so timing is a critical factor.
Suggested Strategy
• Short: We will be fighting the larger trend, so an aggressive entry of 0.8750 is warranted.
• Stop: A stop of 0.8815 is a modest buffer over the range of highs in the event of a break. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• Target: The first objective is set wider than risk (95) at 0.8655. The second is 0.8610.
Trading Tip – The rise in risk appetite may have lost its momentum; but it has yet to be put off its pace. Looking for ranges (much less reversals) for those securities that have a close bond to the whiles of sentiment is a dangerous prospect. A sound strategy with fundamentals, technicals and timing accounted for is essential. With today’s range setup, we are looking at AUDUSD. Congestion has become very consistent for this specific pair; but that fact that it has developed at the extreme of such a steady trend as the one that has controlled price action since March suggests it may not last for long. For this setup, timing is the most important factor. With a frequented range between a range of highs (and little more) at 0.8775 and the pressure of shifting support at 0.85, we have had to produce a strategy that keeps a reasonable risk/reward scenario. What’s more, with the floor on this scene rising, we need objectives that can be met without 12-36 hours. Furthermore, with the big ticket NFPs due this Friday; we have a single event that can induce a breakout. Our setup calls for an aggressive entry and tight stop; but those are necessary to prevent significant losses in the case of an unfavorable breakout. Both objectives are well within the range of a single, active day; and they also compensate for the risk taken on the position. With this setup though, we must cancel all open orders by Thursday and move up stops on any open positions before Friday’s US employment report. This is altogether a setup for only the risk tolerant and we need to control our exposure with the previously drafted AUDNZD and AUDJPY strategies.
Event Risk for Australia and the US
Australia – A steady wind of appreciation is blowing for the Australia dollar. There is little doubt thatinvestor sentiment is in control of the currency’s bearing; but there is a natural bias for it to move more surely when risk appetite is on the rise. The country’s strong economy as well as the central bank’s hawkish language make sure of that. Nonetheless, it will be important to watch for significant corrections in speculative interests which could undermine the Aussie dollar’s hold. As for event risk, retail sales, credit conditions and factory activity are nearby but second tier in terms of volatility. Next week’s RBA rate decision is the real driver for a policy timetable.
US – Is the dollar still attempting to wrench the title of top funding currency away from the Japanese yen? It is difficult to tell considering risk appetite has been tempered for days now. Over the long-term, however, it is very unlikely that the greenback would hold on to such a role as market rates in the US will naturally recovery as stimulus is wound back and investors find their way back into speculative assets. In the short-term through, this can still be a problem for the dollar and a severe catalyst for volatility. The spark for the next wave of risk appetite or aversion is hard to judge; and ultimately, the driver will likely be unforeseen. However, the US docket carries its own weight for risk appetite and fundamentals. Top event risk is this Friday’s employment report. We have come to expect a consistent improvement in pace; so a modest disappointment may not elicit the same response as a better-than-expected read.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? You can send them to John at <[email protected]>.