After languishing along the 7.75 line for an extended period of time, 2013 has jolted some life into the pair with prices moving a significant distance away from the 7.75 floor. “Life” could be an overstatement, as we’ve barely moved 40 pips higher, equating to a 0.5% change. Beating from a dead horse produce larger twitches, but at least price has cleared the 7.725 resistance, opening up 7.754 as the next level of resistance.
The dead horse analogy is certainly apt, with Stochastic readings heading right into the oversold region, and hitting above previous peak with a mere 0.5% rally. There doesn’t seem to be any indication of a strong bullish breakout potential, and price is potentially staying within 7.752 – 7.754, or back to the 7.75 floor once more. Traders hoping for an immense weakness in HKD will almost certainly be disappointed.
At this juncture, it seems appropriate to bring up EUR/CHF as comparison. Both SNB and HKMA have a floor each to defend, and both currencies pairs have endured long periods of inactivity. Eventually EUR/CHF bulls finally hit pay dirt with price rallying up to 1.25, after a whopping 1 year later. HKD bears have not yet endured the same length of time, but it is unlikely to see their misery ending soon. It is also important to note that, current rally is all they’ve got for the EUR/CHF bulls after waiting for so long, with price unable to break above the 1.24 resistance and looking to go lower in the near term.
Why would people still stay in USD/HKD then? Some traders think that shorting USD/HKD is a limited risk proposition, with a HKMA ceiling at 7.85. A short trader will be able to stomach a potential 1.3% loss (unleveraged), with huge profit potential should HKMA fail to maintain the floor, or shift the floor lower. Carry cost on this pair is also low, with HKD interest rates linked to US’s due to the linked-exchange rate system. As such, this proposition becomes attractive – if you can park your funds for an extended period of time hoping for the dead horse to move that is.
Other astute traders may actually see alternative opportunities with HKD. Noting the stability of HKD, traders may wish to mitigate US uncertainty and trade HKD crosses instead. Bearish on Euro crisis but not sure how USD may go? Look into EUR/HKD. Same goes for AUD/HKD and other cross pairs. These may provide good opportunities during a season of US Debt/Cliff turmoil.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.