Both the dollar and underlying risk appetite (easily connected through fundamental terms) are undergoing notable shifts; and few assets are therefore safe from subsequent volatility. This makes for a limited and highly dangerous hunt for range-based currency pairs. We have already exhausted many of those pairs that exploit a tight economic link and match relative risk levels (AUDNZD and EURCHF); which means for new opportunities, we have to venture into riskier pairs.
| Why Would GBPCHF Hold a Range?
· Levels to Watch: -Range Top: 1.8035 (Range, Fib) -Range Bottom: 1.2350 (Fib, Trend, Range Zone)
· Breakout risk is high across the market. The dollar has seen a uniquely forceful breakout; but this move clearly had its roots into general risk appetite. A sharp rally in equities, commodities, fixed income yields and other sensitive assets reveal a meaningful shift in underlying sentiment. GBPCHF has a clear link to these flows, but the high-risk features of the pound and safe-haven appeal of the franc have both deteriorated in the past few months.
· Technical ranges are highly circumstance given the level of volatility across the market; but GBPCHF resistance is relatively clear. A long-term 50% Fib retracement around 1.8050 is the foundation of a technical ceiling – and the confirmation of its significance with the late-June reversal is encouraging. A short-term range is further evidence. Suggested Strategy
· Short: The range of the past three sessions means 1.8000 is a good level for half-sized entry. · Stop: An initial stop of 1.8145 is wide enough to cover the bullish tail on June 24th. To secure profit, move the stop on the second lot to breakeven when the first target hits. · Target: The first objective equals risk (145) at 1.7855 and thesecond target is set to 1.7655. |
Trading Tip – Both the dollar and underlying risk appetite (easily connected through fundamental terms) are undergoing notable shifts; and few assets are therefore safe from subsequent volatility. This makes for a limited and highly dangerous hunt for range-based currency pairs. We have already exhausted many of those pairs that exploit a tight economic link and match relative risk levels (AUDNZD and EURCHF); which means for new opportunities, we have to venture into riskier pairs. GBPCHF was a pair we were following last week as it weathered the few weeks of dramatic flux in optimism following the start of the second quarter earnings season. However, a contracting wedge formation made for a technically dangerous formation. This time around, much of the breakout pressure has dissipated with a broader range allowing for a more direct response to underlying fundamentals. Nonetheless, there is still significant risk considering the level of activity in the market. The suggested strategy looks to reduce risk by reducing position size, placing a relatively wide stop and setting the first target well within a day’s range; yet the threat of an unfavorable break is still high. This is a setup only for the risk tolerant; and regardless of one’s ease with the hazards, we will still cancel all open orders by Wednesday’s close.
Event Risk for UK and Switzerland
UK – The British pound has surged higher against its relatively lower-risk counterparts at the start of this week. Clearly, this currency is finding market sentiment its primary fundamental driver. Optimism was catalyzed by a surprisingly strong earnings season and the windfall advances that overwhelmed resistance for so many different asset classes. However, the fundamentals behind this move are left wanting. Forecasts for a tentative return of positive growth lack confirmation; and even when the technical recovery is in place, expansion will likely be absent until employment and consumer spending return globally. In the meantime, speculation will define price action with few cues as to when a dramatic shift is coming. The only thing pound traders can do is take note of the meaningful economic indicators on the docket and monitor their short-term impact on volatility and lasting ability to guide the currency’s trend (a sign itself that the risk factor could be giving way to more tangible influences). Without doubt, the top piece of event risk over the coming week is the BoE rate decision. There is little probability of a rate change, but growth forecasts and quantitative easing are free rein. Meanwhile, a line of top releases (consumer confidence, services, factory activity) will try to shake the pound’s correlation to risk.
Switzerland – The Swiss seem to have reached a tentative deal on their banking records spat with the US. This represents a significant political risk for a currency that is known for its safe haven status through its private banking sector. Along with the specter of possible SNB intervention, this exogenous and unpredictable risk represents an ongoing fundamental threat. In the meantime, volatility could bubble up through scheduled event risk. The economic docket will cover inflation, consumer spending and employment through July – all the essentials for a general assessment of economic activity.
Questions? Comments? Send them to John at [email protected].
