Today’s NFP release has catalyzed volatility and led many of the majors and risk-sensitive pairs to major moves. In the fray, range levels have been toppled and a momentum looks to be prevalent. This was the potential shift we have been concerned about for most this week; and clearly the field for range-based pairs is very thin.
Why Would GBPNZD Hold a Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.0950 (Range High, Fibs, SMA)[/B]
[B]-Range Bottom: 1.0585 (Fibs, Pivot)[/B]
· After the US employment report crossed the wires this morning, we have seen the majors produce significant reversals and convincing momentum in the dollar’s favor. This is just the first step towards a true reversal; and significant anti-dollar resistance still stands in the way. We will have to see whether this trend is picked back up after the weekend and how it coordinates with other securities activity. As for data, the docket is heavily weighted to the US.
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· It is hard to look beyond short-term volatility in today’s price action; but this burst of momentum fits within a bigger picture. Despite USDCHF’s rally Friday, this pair is still contained without a much larger technical range. A prominent 50 percent Fib at 1.0950 is ahead; and there are complementary dollar-resistance levels in many of the other majors.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Short[/U][/B][B]: Half-sized (or smaller) orders will be set to 1.0910, which is well below the range low.[/B]
· [B][U]Stop[/U][/B][B]: A stop of 1.1010 is wide enough for the general range ceiling; but not June’s swing high. 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 (100) at 1.0810 and the second target is set to 1.0685.[/B][B][/B]
[B]Trading Tip [/B][B]– Today’s NFP release has catalyzed volatility and led many of the majors and risk-sensitive pairs to major moves. In the fray, range levels have been toppled and a momentum looks to be prevalent. This was the potential shift we have been concerned about for most this week; and clearly the field for range-based pairs is very thin. Any position that we look for either has to fully buffer the swell in risk trends (not likely considering many currencies are transferring the volatility seen in their risk-based crosses to their more stable ones) or take a stance on market conditions. With USDCHF, we are taking on significant risk under the assumption that the advance in the US dollar and risk appetite will slow as it meets sturdy resistance. We can see these levels elsewhere with EURUSD, GBPUSD and AUDUSD; but the same is not true for other risk-sensitive markets. The dollar, under normal circumstances, is considered a safe haven currency; so the market will have to sort this discrepancy out quickly. If risk appetite maintains its bullish path, this position will lose its appeal. Our strategy takes the standard steps to reducing risk: cutting position size, widening stop and setting a reasonable first target. The best approach with this pair though is to closely monitor the market’s taste for risk at the start of the week to see if entry is warranted. If this position doesn’t trigger by Wednesday or market activity doesn’t develop as it should we will cancel orders.[/B]
Event Risk for UK and New Zealand
US - The US dollar is the focus of the FX market. Currently countering risk appetite (the yen crosses are rising), the world’s most frequently traded currency has embarked upon a very aggressive but tentative bullish reversal. This move was initiated by a better-than-expected July employment report which reported fewer jobs lost than expected as well as a surprise downtick in the unemployment rate. What traders need to ask themselves is whether this is the kind of indicator that carries with it the necessary fundamental influence to change the dollar’s relation to risk or move the outlook for the US recovery ahead of the pack. While the data did come in above consensus, it was hardly a solid sign of positive growth in itself. Therefore, to keep the dollar moving, next week’s data will likely have to make some contribution to momentum. Retail sales, industrial production and consumer confidence figures will have a standard influence on growth forecasts. Potentially more market moving though, the FOMC decision (and statement) as well as the CPI data will weigh in on the renewed speculation for possible rate hikes before the mid-2010 outlook Bernanke has offered.
Switzerland - Scheduled event risk will likely have little impact on the Swiss franc – not from the Swiss’s own calendar anyway. The only regular indicator to cross the wires next week will be the upstream inflation report for July. With the SNB moving at a cautious, quarterly pace; there is little risk that they will suddenly alter course on policy to suit this indicator. On the other hand, there is significant European event risk ahead. The first measure of Euro Zone 2Q GDP will define how the region is doing, and therefore offer a fair indication for how Switzerland is doing. Outside of the regular course of data, the currency’s safe have value is under review.
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>