GBPCHF Range Fortified by Technicals, Resistant to Fundamentals

One of the most important factors for range trading in today’s markets (beyond finding an attractive technical setup) is finding a pair that is not directly correlated to the rest of the market. For the vast majority of the viable, liquid exchange rates; risk appetite is the primary source for trend and volatility.

How stable is the GBPCHF Range? • Levels to Watch: -Range Top:       1.6950 (Fib, Pivot) -Range Bottom: 1.6675 (Fib, Pivot) • Comparing the price action between equities and GBPCHF we see little direct correlation. This is a good sign as is suggests one of the most unpredictable and influential drives for the broader markets poses less of a threat to this specific pair’s range. Nonetheless, fundamentals do factor in. The British pound backs the worst performing economy (made worse by a credit rating warning from Fitch). Scheduled event risk threatens mild waves. • Congestion developed over the past three week’s maintains strong levels of both support and resistance. The ceiling on pattern is founded on a 61.8% Fib and a pivot developed through the past year at 1.6950; while the floor is the 38.2% level of the same wave and notable pivot near 1.6675. The real concern is determining the medium-term trend. Suggested Strategy • Short: Setting entry at 1.6925 is aggressive given recent highs but is well within the range. • Stop: For an initial stop of 1.7005, we easily cover the past month’s tails at resistance. To secure profit, move the stop on the second lot to breakeven when the first target hits. • Target: The first objective is one-and-a-half times risk (120) at 1.6805. The second is 1.6725.

Trading Tip – One of the most important factors for range trading in today’s markets (beyond finding an attractive technical setup) is finding a pair that is not directly correlated to the rest of the market. For the vast majority of the viable, liquid exchange rates; risk appetite is the primary source for trend and volatility. Therefore, finding range setups day in and day out becomes a game of speculating on the health of sentiment. What’s more, if we are not careful, our efforts at finding different pairs is render useless as we could leverage our exposure to an underlying driver. For those floating more than one range position (or various positions founded through any means of analysis), it is important to take stock of your exposure to those factors that go beyond merely leveraging up on a single currency. As for GBPCHF, the correlation to risk trends is very low. Where the Swiss franc is often considered one a good funding currency candidate, the pound is not an attractive carry currency. An extended recession, ballooned quantitative easing program and the impending threat of government spending cuts means this currency can supply neither a reasonable yield nor the promise of rising rates in the immediate future. Technically speaking, the boundaries to this range are both well founded. Our strategy looks to play a reversal from resistance; but there is a question as to the medium-term trend (long-term is clearly bearish). For this reason, either side of the congestion pattern is fair game. However, regardless of direction, this should take only a few days to setup and play out or we will cancel all open orders to reevaluate.

Event Risk for the UK and Switzerland

UK – The British pound is a fundamental oddity. The benchmark market yield for the currency makes it a reasonable carry; but the disastrous fundamental outlook for the United Kingdom quickly thwarts all hope of appreciation through yield expectations. With an ongoing recession, extremely loose monetary policy stance and ballooning fiscal deficits; it is difficult to gauge when the currency will be able to reenter the normal stream of speculation. Until then, there will always be the possibility of sharp and unexpected swings in price action that follow vague changes in sentiment. For the economic calendar’s part, next week’s BoE minutes holds the greatest potential for volatility. The Quarterly Monetary Policy report offered an outlook for inflation and insight into their reasons for expanding the bond purchasing program; but they could further clarify the issue with this release (perhaps with the MPC vote and sentiments).

Switzerland – While the US dollar may hold the title of top funding currency in name, the Swiss franc actually holds the lower benchmark market rate (3 month Libor). This may not impart the franc with the same troubles that the greenback suffers day in and day out; but its influence is clearly measured in for those Swiss crosses that hold a significant yield differential. For this reason, the top fundamental concern for this currency is, without question, investor sentiment. However, short-term volatility could still be roused by notable, event risk. The retail sales, trade balance and ZEW survey numbers all account for notable areas of the economy.

Written by: John Kicklighter, Currency Strategist for DailyFX.com 

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.