The dollar is struggling to develop a meaningful, bullish reversal; and volatility over the past 24 hours has run abnormally high. These are not the ideal conditions to draw ranges from. Nonetheless, there are a few opportunities that can be approached with the correct frame of reference and a sound strategy.
[B] How stable is the USDCHF Range?
• [U]Levels to Watch:[/U]
-Range Top: 1.0475 (Trend, Fibs)
-Range Bottom: 1.0200 (Swing Low)[/B]
• USDCHF has seen an extraordinary bout of volatility over the past 24 hours. The dollar itself has contributed to this high level of activity with a tumble that has developed alongside a drop in risk appetite early in the US session. However, the real impetus for this sharp move was rumor of SNB intervention on the franc’s behalf – a temporary effect that has likely passed. Now, we have to worry about this week’s top scheduled event risk: [Friday’s US NFPs](http://www.dailyfx.com/story/bio1/US_Dollar_Event_Risk_Stacked_1253906477033.html).
• It is difficult to spot a range for USDCHF; but congestion is blatant. A comparison to the dollar’s positioning across the majors shows that there is both a sluggish pace and round of technical levels that can hold the dollar. [For the franc-based pair](http://www.dailyfx.com/story/bio2/Dollar_Finds_Demand_on_Dips_1254320227092.html), we are in a choppy reversal in an over-extended trend. Resistance is a fib and trendline confluence.
[B]Suggested Strategy[/B]
• [B] [U]Short[/U]: An aggressive entry at 1.0450 is essential to our strategy even if resistance is on the move.
• [U]Stop[/U]: Our primary, technical concern is a falling trend from April. A 1.0530 stop could cover it. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• [U] Target[/U]: The first objective is one-and-a-half times risk (120) at 1.0330. The second is 1.0250. [/B]
[B]Trading Tip[/B] – The dollar is struggling to develop a meaningful, bullish reversal; and volatility over the past 24 hours has run abnormally high. These are not the ideal conditions to draw ranges from. Nonetheless, there are a few opportunities that can be approached with the correct frame of reference and a sound strategy. For USDCHF, the already high level of activity today was further leveraged by supposed intervention by the SNB to sell francs. Naturally, this is not a driver we would expect to be repeated anytime soon; so its influence has likely passed. At the same time, today’s wide range will make it easier for the market to climb up towards the falling trend that has defined the bear trend since April. However, this is a complicated setup. Trend conditions are still in place and the current bounce from 14-month lows could turn from correction to reversal rather quickly. Essentially, our range setup is looking to follow trend continuation and therefore makes it more complicated in looking for defined levels. Our entry is set very close to the current trendline and a confluence of Fibonacci levels at 1.0465/500. Should the dollar find momentum, it wouldn’t be difficult for USDCHF to be pushed all the way up to the former congestion support of 1.0550. As such, we will have to monitor the dollar’s pace across the market as well as risk appetite when nearing an entry on this pair. This is clearly a trade for those comfortable with risk and comfortable with making discretionary calls on market activity across multiple pairs. We will cancel all open orders by Friday.
Event Risk for the US and Switzerland
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.
Switzerland – Though it is a low-probability and unscheduled event, the Swiss National Bank’s efforts to intervene on behalf of the franc produce incredible levels of volatility – as we can see with the supposed selling today. This is a threat that we need to be cognizant of when there are potential triggers (like growth indicators, policy statements, voiced financial concerns, etc). Aside from this vague threat; there are a number of economic indicators that could weigh in on price action. Before the weekend, the SVME PMI survey will offer a gauge on business activity for the month of September. Next week, the data rises in timbre with the consumer inflation data measuring the lack hawkish pressure out there. The unemployment rate will weigh in on the other major policy concern: growth.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? You can send them to John at <[email protected]>.