Levels to Watch:

- Range Top: 0.6625 (Trend, Rang high)
- Range Bottom: 1.5800 (Trend, Fib, Rang Low)

It is very risky to try and pick ranges in the kind of market conditions we have seen today. A global wave of risk aversion has sent many dollar pairs and all the yen pairs rallying in favor of their respective safe haven components. One of the very few opportunities still out there is the congestion seen in AUD/USD. However, this pair seems to be carving a wedge (a common prelude to a breakout) and interest rate expects have significant weight here.

While the technicals are otherwise clear for AUD/USD’s congestion, high volatility could easily encourage a run on the range extremes. Spot is now near support which is called in a rising trendline and a double bottom around 0.6600/25. Resistance is put into place with a falling trendline and its own range high at 0.7035/75.

Suggested Strategy

- Short: Considering volatility, an aggressive entry at 0.7025 is essential.
- Stop: Just as we need a high entry to reduce risk, we need a wide initial stop at 0.7100. When the first lot hits its target, we will move the second lot’s stop up to breakeven.
- Target: Our first target will match risk (75) at 0.6950. Second objective will be 0.6825.

Trading Tip – Only those traders that are highly risk tolerant should consider range trades in the kind of market environment that we have experienced recently. With that disclaimer out of the way, our AUD/USD setup was one of the very few in the market. What’s more, we are not comfortable with taking the long side of this congestion zone as the broad wave of risk aversion leverages the potential for a downside breakout -- not to mention the dominant trend is bearish. Our short-side trade looks to enter near the falling trend that happens to double as a range high -- a decent technical setup. It is still important however, even though we are keeping to the larger trend, to remain keep tight stops. Furthermore, we need to be realistic and appreciate that market conditions can change very quickly considering the level of volatility and the presence of panic circulating through the market. As such, we will cancel our entry orders should AUD/USD break lower or they not be filled by Friday.

Event Risk Australia And US

Australia – Risk sentiment easily overwhelms any other fundamental concerns for the Australian dollar. With the market looking to deleverage risk, investments that are based on Australia’s high benchmark rate are clear candidates. This sentiment is doubled by the dour interest rate and economic conditions forecasts. Australia, until a few months ago, was considered one of the few economies that would avoid the slump that was overtaking the US and Europe. Recently, however, investors and market commentators have seen that the slowdown is global and the Australasian dollar will have to find a balance as an equal to other economies that are looking to recession (like the US). What’s more, the sharp drop in growth has led to a sharp drop in interest rate expectations – one of the key selling points of the Aussie currency. From the docket, data will merely gauge the health of lending and growth.

US – Data for the remainder of the week doesn’t threaten much in the way of translated price action. Instead, the market will continue to gauge whether US interest rates will bottom out soon (and further whether the US dollar is a viable funding currency) and if the recession State-side will be shorter and shallower than its major counterparts. Looking beyond the weekend, we can see the threat of major event risk. The FOMC rate decision is completely up in the air after the unexpected 50 basis point rate cut from yesterday and considering how low it already is at current levels. Also, the advanced GDP reading will offer either confirmation or a correction to expectations of the worst.

John Kicklighter a Currency Strategist at FXCM.