Congestion for EURCHF is more a product of natural fundamental ties rather than even-handed market forces or frequented technical levels. Switzerland’s heavy dependence on the Euro Zone for growth and market policy guidelines are clear from an economic standpoint; and therein lies a naturally buffer to high volatility that may develop from risk trends.
| How stable is a EURCHF Range? |
Trading Tip – Congestion for EURCHF is more a product of natural fundamental ties rather than even-handed market forces or frequented technical levels. Switzerland’s heavy dependence on the Euro Zone for growth and market policy guidelines are clear from an economic standpoint; and therein lies a naturally buffer to high volatility that may develop from risk trends. However, as we have seen in the past, this is still a difficult pair to range trade. On the one hand, during regular market conditions, market activity can thin out to the point that we won’t see momentum build behind a swing in the congestion band to fulfill a range setup within a reasonable time frame. This is a consideration with our suggested strategy as our two-to-one risk/reward ratio on the first objective would demand a considerable level of activity from this otherwise staid pair. The more atypical problem with this pair is influence that scheduled event risk may have on this pair. It is clear that over time, this pair defaults to relatively choppy price action; but there are periods when we see incredible volatility and significant breakouts. Over the past six to nine months, these unique events have come through SNB intervention. Nonetheless, Swiss GDP data and an ECB rate decision could supply enough surprise to drive a break through a moderate support level like 1.5150/40. In response to both concerns, we will cancel all open orders before the ECB’s rate decision.
Event Risk for the Euro Zone and Switzerland
Euro Zone – Investor sentiment isn’t a clear cut price driver for the euro. A yield advantage and relatively strong economic outlook (according to policy makers) sets it in the riskier end of the spectrum. However, reservations have been held by the market and the offsetting consensus has put it right in the middle of pack. On the other hand, we have plenty of scheduled event risk in the days ahead to set of volatility. A consistent round of market moving data really kicks off starting on Tuesday with German employment data. This is followed by the second measure of Euro Zone 2Q GDP numbers. The component data can alter the bearing on economic forecasts for second half growth. The ECB rate decision on Thursday is top event risk; but the central bank is not expected to change rates. Instead, commentary can give insight into timing while the following days European Commission forecasts will set growth speculation.
Switzerland – Typically, the Swiss franc finds little influence through its typical economic calendar and is instead highly reactive to risk trends. However, these conditions could be reversed with EURCHF this week. As for risk appetite, Switzerland’s health is so dependent on the broader European Community that even strong shifts in market sentiment are smoothed out for this pair. However, going beyond this unique relationship, it is also the case that the Swiss franc has seen its status as a safe haven currency has diminished with time. With the SNB’s efforts at intervention smacking of protectionism and the government caving to US demands for details on American’s with accounts in the usually private banking system, there is a decided sense that this currency is fading as a safe haven. As for the event risk, 2Q GDP is a unique indicator that may hold considerable influence as traders look to gauge the timing of recovery.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected]
