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Hedging Range Trades

Pound to See Relief Rally Against the Canadian Dollar (Forex Hedging Strategy)

Mon, Aug 25 2008, 06:15 GMT
by Ilya Spivak

FXCM

The Canadian dollar may benefit as investor confidence sours in British and European markets. It is clear that Britain may no longer claim that it has been able to avoid the US-led downturn. Indeed, economic growth stalled in the second quarter with GDP coming in at 0.0%. Monetary easing is soon to follow, with traders pricing in 50-75bp worth of cuts over the next 12 months.
Recent rhetoric from the Bank of England has been supportive as policymakers openly stated that there is a “risk that the slowdown may be more pronounced” and that they expect inflation to “fall back sharply to a little below the 2% target in the medium term."

Meanwhile, the Canadian economy could be on the come-back trail. Core Retail Sales came in much better than expected at 1.4% versus 0.6% for the month of June. Canadian Dollar buying pressure seems to be strengthening as the market has consecutively reduced the odds of BOC rate cuts over the past week. July’s precipitous drop in crude oil prices may see renewed vigor in US demand for Canada’s prized petrol exports, offering much-needed stimulus to the external sector. With the UK and other European economies teetering on the brink of a recession, Canadian assets may attract substantial capital as a store-of-value alternative and see the Loonie strengthen against the Sterling and the Single Currency.

With the underlying economic outlook favoring the Canadian Dollar, technical positioning opens the door for a short-term retracement of recent strength. GBPCAD price action has been oscillating in a descending channel since November. The pair is now positioned near support, with a corrective rally targeting downward-sloping resistance at 2.0297. The stochastic oscillator is found mid-way into a decline, suggesting a near-term bottom is forthcoming.

Hedging Strategy

Currency Pair: GBPCAD

Long Term Bias: Bearish
Long Term Position: Holding Short

Short Term Bias: Bullish
Short Term Position: Buy above 1.9132, Target 2.0297, Stop-Loss at 1.8553

Traders looking to protect their existing short GBPCAD position or enter short at a favorable price may consider a hedge long GBPCAD above 1.9132 with a target at 2.0297. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should GBPCAD break out to the downside prior to the limit being hit. We will set the stop-loss near 1.8553.

When should I use the hedging feature?

Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.

The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.

For more information on FXCM hedging strategies please visit http://www.fxcm.com/hedging.jsp.

Published on  Mon, Aug 25 2008, 06:15 GMT

Archive

• Pound to See Relief Rally Against the Canadian Dollar (Forex Hedging Strategy)
  Published On Mon, Aug 25 2008, 06:15 GMT
• Hedging Euro Strengh Against the Lira Creates Entry To Yield-Driven Trend
  Published On Mon, Aug 18 2008, 08:49 GMT
• Hedge To Protect Pound Bulls As NZ Dollar Retraces Losses
  Published On Tue, Aug 12 2008, 06:23 GMT
• Hedge Covers Long-Term Sellers NZDJPY Looks to Correct Higher
  Published On Fri, Aug 1 2008, 10:37 GMT
• Yield-Driven EURJPY Offers Short Retracement Hedge
  Published On Wed, Jul 23 2008, 06:14 GMT

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