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Pairs to Range Trade

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AUDCAD Offers One Of the Few Ranges In A Wave Of Breakouts

Wed, Nov 12 2008, 06:23 GMT
by John Kicklighter

DailyFX

Many of the majors are taking the first steps towards a breakouts; and where the majors go, the crosses follow. Therefore, all range setups should be fundamentally and technically sound, while also keeping a short time horizon. AUDCAD fits the bill.

Why Would AUDCAD Stay in a Range?

• Levels to Watch:
  -Range Top: 0.8190 (Trend, Fib)
  -Range Bottom: 0.7800 (Trend, Fib)

• Ranges that have established in the majors over the past two weeks are starting to breakdown, suggesting a shift in market conditions is at hand. To avoid the potential wave of breakouts and revived trend (at least temporarily) we can turn to AUDCAD. Aside from a clear range – that has yet to be breached – this pair is comprised of two commodity currencies, with central banks keen on rate cuts.

• The technical foundation behind a AUDCAD congestion setup is far more convincing than the fundamentals behind the pair. A mature wedge has developed over the past four months. A descending trendline from late July offers significant resistance in conjunction with a 38.2% Fib of the Jul 15th to Oct 10th bear wave around 0.8175/200. Support is a short-term rising trend and Fib at 0.78.

Suggested Strategy

• Short: Entry orders will be set at 0.8165, slightly below the current level of the falling trend.

• Stop: The initial stop will be set above the recent swing high at 0.8240. To protect profit, we will move the stop on the second lot to breakeven when the first target is hit.

• Target: The first objective equals risk (75) at 0.8090. The second target will be 0.7975.

Trading Tip – Many of the majors are taking the first steps towards a breakouts; and where the majors go, the crosses follow. Therefore, all range setups should be fundamentally and technically sound, while also keeping a short time horizon. AUDCAD fits the bill. There are few technical formations that are as supportive of congestion as this pair. However, the wedge that has provided the parameters for price action over the past months now has less than 400 points of room to move and moves closer to its apex every day. And, while there is a balance between interest rate forecasts (as the RBA has a higher rate but is cutting more quickly and BoC has a lower rate but is more restrained in its easing), it is clear that we should have a clearly defined time limit on this strategy to avoid a breakout. With this reasoning in mind, we will cancel any open orders by Thursday. Obviously, we will also cancel orders should the pair mark a breakout before executing our entry. The suggested strategy looks to keep in line with the dominate trend, but aggressive traders could take the risk, long side of the range.

Event Risk Australia And Canada

Australia – Fundamentals may have a heavy influence on the Australian dollar over the coming week; but our time limit on our strategy should render our setup immune from most of its. The single indicator to fall within our time frame is the consumer inflation expectation survey for November – a good contributor to interest rate expectations. Should consumers believe, despite the pinch on income and lack of pass through in recent rate cuts, that their cost of living is falling; it would give explicit support to the RBA’s aggressive rate cuts. Beyond our purview of event risk, the twin drivers of recession and interest rate speculation will be recharged with a 3Q retail sales gauge, a growth outlook in the Leading Index and the RBA’s November minutes. Before all this scheduled data crosses the wires, we will need to be concerned about general risk sentiment. Should the swells of risk sentiment rise once again, it could easily drive the Aussie dollar down and through the floor of its range.

Canada – Scheduled event risk is very light for the Canadian dollar. The top event risk over the coming week also happens to fall within our trade window. The international merchandise trade balance for September is a key reading for this export dependent economy. A drop in global demand (especially for key Canadian goods like oil and autos) could easily overwhelm the sharp drop in the currency to weigh the trade balance lower. Outside of this indicator’s influence, there are few real themes for fundamental price action behind this currency.

Published on  Wed, Nov 12 2008, 06:29 GMT