There is a very clear and mature range for USDCHF; but there is still a problem in actually developing a successful strategy for it. The reason this obvious congestion is difficult to trade is the inconsistency in the swings.
| Why Would USDCHF Hold a Range?
· Levels to Watch: -Range Top: 1.0950 (Fib, Range High) -Range Bottom: 1.0590 (Trend, Pivot, Fib)
· The primary fundamental drivers for the majors are either risk appetite or the health of the US economy. For USDCHF, market sentiment has a distorted influence as both the dollar and franc have seen their link to risk aversion wane with time and unique developments. Looking for other sources of volatility, the economic calendar is exceedingly light after the consistent round of headline data this past month. The general pace of the dollar will likely dominate.
· It is hard to miss the range that has defined USDCHF price action for the past two-and-a-half months. However, whereas the pattern may be clear, it is also very choppy. There is relative resistance in a loose trendline that now comes up on the general 15-month pivot that comes in around 1.0590 and is further setup by a 1.0640 Fib. Suggested Strategy
· Long: Entry orders will be placed well enough above the August swing low at 1.0620. · Stop: A wide stop is essential for such an ill-defined range. This cut point is 1.0520. To secure profit, move the stop on the second lot to breakeven when the first target hits. · Target: The first objective equals risk (100) at 1.0720 and the second target is set to 1.0820. |
Trading Tip – There is a very clear and mature range for USDCHF; but there is still a problem in actually developing a successful strategy for it. The reason this obvious congestion is difficult to trade is the inconsistency in the swings. For example, through most of June and July, we were presented with support around 1.0625. However, at the beginning of August, a momentous plunge would break this level just before stalling and reversing with a new low for the year. Going forward, we need to protect against these types of moves without accepting too much risk should a genuine breakout. Our basic strategy looks for entry very near the absolute low of this month’s bullish reversal. This allows for a wide stop that would likely be hit if there were a true breakout underway. The tradeoff is the notional risk (which can be trimmed down by lowering position size) and timing. As we are somewhere near the middle of the range at the end of this week, it could take some time to reach one of the extremes - especially with the relatively quiet docket next week. We could just keep this order open long enough to execute (or negate should it break to the upside); but conditions could change too substantially for this to be safe. Therefore, we will cancel all open orders by Thursday.
Event Risk for US and Switzerland
US – After a series of weeks with major event risk crossing the wires (FOMC rate decision, NFPs, GDP), we are now coming upon a slump in event risk. Looking at the docket for the coming week, there are very few indicators that will have very much impact on the underlying fundamental trends much less short-term volatility. The only noteworthy data on tap is related to housing sector activity. Housing starts and existing home sales data for July will gauge vital statistics for a component of the economy is considered the catalyst for the world’s current struggles. Sales data is the foundation reading, offering a benchmark measure of demand and inventories. To this, housing starts can be better gauged as an early rebound (which could lead to stagnation later on) or a genuine sector recovery where construction is rising with inventory off the books. Aside from this data, the dollar had an activity close through Friday, so general trends could come into play and perhaps even commentary at Friday’s Jackson Hole symposium can give guidance.
Switzerland – While the rest of the market is expected to suffer a drought in terms of scheduled event risk, Switzerland will actually see its calendar fill out next week. Noteworthy data includes retail sales, the trade balance and ZEW investor sentiment survey. This is a broad reading from different, critical groups for the economy. June retail sales will be a key reading for domestic consumption – what could ultimately define the health of Swiss economy as Euro Zone demand is tempered by its own economic troubles. For actual trade activity, the physical balance for last month will mark a major indicator for defining growth. Then, the ZEW survey will measure the market’s reaction to foreign influence over banking secrecy laws. However, with all of this taken into account, we may still see very little volatility from this data – as usual. Instead, the franc will look to the dollar and euro for its cues.
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at [email protected]
