Having come to the end of the week, both the fundamental and technical standing of the markets looks very unstable. Furthermore, it is a rule of thumb that range positions should not be established at the end of the week (especially if the stop and objectives are relatively tight) because unexpected event risk could make for a volatile and potentially dangerous open on Monday morning.
| How stable is the EURNZD Range? • Levels to Watch: -Range Top: 2.0235 (Trends, SMA, Fibs) -Range Bottom: 1.9975 (Fib, Range Low) • Volatility has been relatively reserved for the past week for EURNZD – this despite a pickup in interest rate speculation for the New Zealand dollar and some activity in risk appetite. This pair is fully engaged in sentiment trends; but its correlation is not one-to-one. However, the currency pair’s response will depend on the extent of any given fluctuations in the underlying, fundamental driver. Event risk poses relatively little threat. • A bear trend has been in place for EURNZD since March; and its pace and consistency are impressive. Fighting this trend is possible but the gains that can be generated from such a move are limited at best. Recent price action has seen congestion develop just this past week, with a fairly definable range between 2.0235 and 1.9975. Suggested Strategy • Short: Entry has to be set aggressively at 2.0220 given the tight range. • Stop: An initial stop of 2.03 is risky considering the size of the average daily tail. To secure profit, move the stop on the second lot to breakeven when the first target hits. • Target: The first objective is equal to risk (80) at 2.0140. The second is 2.0040. |
Trading Tip – Having come to the end of the week, both the fundamental and technical standing of the markets looks very unstable. Furthermore, it is a rule of thumb that range positions should not be established at the end of the week (especially if the stop and objectives are relatively tight) because unexpected event risk could make for a volatile and potentially dangerous open on Monday morning. Our EURNZD setup flies in the face of these rules; and therefore is a low probability setup that is only for the most risk tolerant. However, there are ways to improve the situation with such a setup. Off the bat, it is important to note that this pair is highly sensitive to underlying changes to sentiment. The aggressive, seven-month bear trend is testament to that fact. As such, the better strategy is to follow the dominate trend rather than to fight it. Furthermore, our range is looking at a relatively tight congestion pattern that requires an aggressive entry and tight stop. Clearly, this is a situation where constant vigilance and remaining conscience of the volatility behind risk appetite are vital. An easy, additional step to take is to only place orders after establishing what type of price action the market will have at the start of the week. This is a position that should trigger Monday and play out the same day (the average daily range shows that this is well within reason); so all orders will be cancelled by the end of that same day.
Event Risk for Europe and New Zealand
European – The euro has had little control over its own fundamental direction these past few months. Ever since the economic outlook was tempered by the dour readings from a number of notable Euro Zone members and ECB officials doused speculation of near-term rate hikes with remarks that were specifically tailored for a wait-and-see approach, the bullish drive from the euro has diminished. However, the currency hasn’t necessarily lost its buoyancy. As the primary counterpart to the US dollar, the euro has reaped the benefit of being the anti-dollar through the steady rise in risk appetite and talk of shifting reserves away from the established safe-haven. The indirect influence of risk appetite and the dollar’s struggle will be the primary catalyst for the second most liquid currency in the world next week. However there is notable event risk to take note of next week as well. All of the major market movers over the period are due within a few hours of each other. The PMI figures are used as a leading gauge for economic activity (an interesting trait with 3Q GDP due in a few weeks). The German IFO business sentiment report and regional industrial new orders will be market moving on their own; but their impact will likely be limited.
New Zealand – What strength the New Zealand dollar has found recently has largely been associated to the draft found in market sentiment and the RBNZ’s unexpected announcement that they are going to begin rolling back emergency stimulus. The New Zealand economy is indeed improving; but policy officials are also trying to fight the appreciation in their currency. Unforeseen events can have an expected impact on price action; but for now, the data on deck will only have a moderate impact on the long-term outlook for growth.
