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Pairs to Range Trade

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Strong AUDCAD Range Won't Hold For Long

Thu, Nov 20 2008, 08:17 GMT
by John Kicklighter

DailyFX

The clock is ticking for a short-term AUDCAD range. For the past few weeks, the pair has worked itself into a very clear and concise range that would be a range traders dream.

Why Would AUDCAD Stay in a Range?

• Levels to Watch:
  -Range Top: 0.8135 (Trend, Fibs, SMA)
  -Range Bottom: 0.6350 (Trend, Fib)

• The outlook for growth and interest rates between the Australian and Canadian dollars has found a temporary level of equality. This is perhaps the reason why an otherwise volatile pair has been able to produce such a consistent technical range. However, speculation rarely remains steady for long. The only major piece of scheduled event risk for the rest of this week is Canadian CPI, but all it would take is a spike in risk to send this pair moving.

• Technically, AUDCAD has a very sound range formation to work with. A longer-term falling trendline is matching up with a short-term trend (the one shown) with the support of the 50-day SMA and a confluence of Fibs all around 0.8140/75. In contrast, a rising trend of lows and Fibs also calls up support. Together, they make a strained wedge.

Suggested Strategy

• Short: Entry orders will be set at 0.8110 – below the hard level of the range and within the trend.

• Stop: An initial stop at 0.8170 is sensitive to a potential false breakout, but is necessary. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (60) at 0.8050. The second target will be 0.7950

Trading Tip – The clock is ticking for a short-term AUDCAD range. For the past few weeks, the pair has worked itself into a very clear and concise range that would be a range traders dream. However, recently, this range has turned into a wedge. And, with the apex quickly approaching, the probability for a breakout grows more intense. With such clear levels, traders will attempt to take advantage of the high volatility in the market to take advantages of quick swings; but eventually, a boundary will be breeched and tripped stops will turn momentum into market direction. To reduce the threat of a major breakout, we will keep any orders open for only until mid-day in the US session. Also, our suggested position is for a short position – to align ourselves with the dominant trend and to improve the probabilities of a successful trade considering the potential for a breakout. However, for the risk tolerant who will be monitoring the market over our window for a setup, a long position could come trigger and take profit very quickly considering how broad the daily fluctuations have been. For those willing to take the risk, an entry at 0.7875, stop at 0.7815, and targets at 0.7935 and 0.8035 creates a decent setup as well.

Event Risk Australia And Canada

Australia – The Australian dollar has fallen into fundamental congestion over the past few weeks as risk sentiment has settled somewhat and speculation over rate decisions has become less volatile. However, the Aussie dollar is still highly sensitive to risk trends as one of the highest yielding G10 currencies – and one whose economic outlook and benchmark lending rate have been cut sharply. When such concerns will be revived is hard to predict; but it is easy to see that there are few pieces of traditional, scheduled event risk to be concerned with. Most of the notable indicators due over the next week come after the weekend. However, readings of the housing sector’s influence on growth and the financial crisis’s impact on Australian credit markets could certainly be market moving.

Canada – If a specific economic indicator were destined to spark volatility for AUDCAD, it would be the Canadian CPI numbers due the Friday. Even though the market has heavily discounted interest rate expectations for the Bank of Canada over the coming months, there is still a high level of uncertainty surrounding what the central bank is expecting and how aggressively they may act to prevent a situation like that in the US or Euro Zone (where a late response means a more dramatic one). The CPI reading will be a good guide for their pace going forward. Should inflation drop off as sharply as it has in the US and Europe, fears of deflation may begin to expose a dour forecast for growth. If this is the case, preemptive action will be easy to justify.

Published on  Thu, Nov 20 2008, 08:23 GMT