We have looked to EURCHF for range opportunities for weeks now; and we are once again drawn to this pair for yet another congestion setup. However, the fundamental and technical risk is building for an eventual breakout.
| Why Would EURCHF Hold a Range?
· Levels to Watch: -Range Top: 1.5145 (Trend, Fibs) -Range Bottom: 1.5010 (Double Bottom, Fib)
· A heavy round of scheduled event risk passed this morning; but the reaction from EURCHF certainly wasn’t what would be expected. Disappointing German and Euro Zone first quarter GDP numbers sent the euro tumbling in most of its pairings. However, the franc cross actually rallied through today’s session leaving market participants to wonder whether the SNB was selling its currency. This will be an ongoing problem next week.
· Congestion is still obvious for EURCHF; but its consistency has suffered with time. A descending wedge pattern is still in play, but over the past three weeks, the modest bias behind the falling trend has threatened to turn into a horizontal congestion band. This could certainly change the nature of the setup and make it difficult to place stops.
Suggested Strategy
· Short: Half-sized entry orders will be placed at 1.5125 which will require a dip to fill. · Stop: An initial stop of 1.5175 covers today’s high and the trend but not the May 7 swing high. To secure profit, move the stop on the second lot to breakeven when the first target hits. · Target: The first objective equals risk (50) at 1.5075 and the second target will be 1.5075. |
Trading Tip – We have looked to EURCHF for range opportunities for weeks now; and we are once again drawn to this pair for yet another congestion setup. However, the fundamental and technical risk is building for an eventual breakout. This morning, disappointing GDP numbers from Germany and the Euro Zone sent the euro reeling against most of its liquid counterparts. EURCHF clearly bucked this trend, however, rallying sharply through the day. While it is difficult to confirm, this drive is not likely a reflection of economic data but rather central bank intervention (that the SNB has vowed to pursue on many different occasions). If this is the case, the large franc sale was likely an effort to offset the growth data and will fade when the momentum following the data has passed. As for the range itself, the wedge pattern is growing claustrophobic. Our total range is only 130 points wide. To have a reasonable risk/reward scenario, we have had to place the targets relatively close and this means a tight stop (necessary as we could see the wedge pattern turn into sideways chop). The risk that this pattern is coming to its end is high. So, our strategy has been cut in half to further lower our notional risk. Under most circumstances, I don’t like to take a position so close to the week’s close; but this may actually play in this setups favor as we are attributing the recent buoyancy to intervention that is likely to disappear with the weekend. I will cancel any open orders by Monday’s US close or should spot hit 1.5175 or 1.5035 before seeing entry. For live positions, this should play out by Wednesday or we will get out of the market.
Event Risk for Euro Zone and Switzerland
Euro Zone – The euro may have assimilate the most influential round of event risk the currency has seen since the ECB’s rate decision last week. A sharper than expected, negative revision to first quarter GDP subverts the market’s attempt at calling an early recovery from this economic leader. What’s more, it tips the scales on the argument for further rate cuts and expanding the bank’s unorthodox covered bond plan. This will hold over the market as each day passes without a severe shock to general risk appetite. Looking at the economic docket next week, the euro has a number of indicators that could add to the disappointing outcome of the growth figures. The PMI numbers are the most influential considering they will give a leading measure of growth from the business side of the market. The ZEW survey will offer a sentiment view of things. As investors are the most speculative of economic groups, their outlook on growth and monetary policy will be taken seriously by the market.
Switzerland – Yesterday, SNB board member Jordan opined that the Swiss recovery won’t come until 2010. He also stated that the central bank was actively implementing its policy of currency intervention (which may have been put to the test today). This mixture of physical and verbal intervention is perhaps the most aggressive a policy authority has taken in years. What’s more, it significantly alters the influence of risk trends and traditional indicators that normally elicit volatility from the franc. There are few speed bumps for general sentiment over the coming week; but the retail sales figures and ZEW survey could certainly give us some fundamental color.
| Data for May 18 – May 25 |
| Data for May 18 – May 25 | ||
| Date (GMT) | European Economic Data |
| Date (GMT) | Swiss Economic Data |
| May 18 | Euro Zone Trade Balance (MAR) |
| May 20 | ZEW Survey (MAY) |
| May 19 | German ZEW Survey (MAY) |
| May 22 | Money Supply (M3) (APR) |
| May 21 | Euro Zone PMI Composite (MAY A) |
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected].
