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Pairs to Range Trade

A USDCAD Range That Looks Beyond The Period Of Low Liquidity

Fri, Jan 2 2009, 05:46 GMT
by John Kicklighter

DailyFX  |  View company's profile

Over the final days of this week, extremely illiquid markets could lead to extremely high or low levels of volatility for the currency market. However, with strong technicals, a clear bias and a sound strategy, a USDCAD range trade could take advantage of a good opportunity.

Why Would USDCAD Hold A Range?

• Levels to Watch:
  -Range Top: 1.2375 (Pivot, Fib)
  -Range Bottom: 1.2075 (Trend, Fibs)

• Event risk from the dollar side of USDCAD will be considerable after the weekend; but for the remainder of this week, low liquidity will both lower the risk of event-driven moves or any assaults on significant technical levels. However, thin markets have been know to leverage volatility; so hard fast levels will be more difficult to call. Looking ahead, the US docket has a glut of data scheduled for release including NFPs and ISM manufacturing.

• From a technical perspective, it is important to position with the larger pattern playing out. So, while there is a notable (though rough) range between 1.2375 and 1.2075 carved out by these shallow markets, we need to look to the at the larger ascending wedge for the inevitable return to normal market activity.

Suggested Strategy

• Long: Half-sized entry orders will be set at 1.2095 – aggressive but within the range.

• Stop: An initial stop at 1.1965 is well outside our range but above the rising trend. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (130) at 1.2225. The second target will be 1.2425.

Trading Tip – Over the final days of this week, extremely illiquid markets could lead to extremely high or low levels of volatility for the currency market. However, with strong technicals, a clear bias and a sound strategy, a USDCAD range trade could take advantage of a good opportunity. Overall, range trading is only for those that are risk-tolerant as low liquidity could easily leverage volatility behind the market. And, a surge in price action could prove dangerous for the relatively tight band of congestion that this pair has been cutting for the past few weeks. However, we have attempted to lower risk with our strategy and to formulate a position that would still look strong after the weekend when market conditions returned to normal. First and foremost, we are looking to follow the larger price pattern and long-term momentum by trading with the ascending wedge. We have lowered our position size to allow for a wider stop – though our stop does not cover the immediate level of the rising trend that defines larger support. We will cancel any open orders by Friday as market conditions will certainly shift.

Event Risk US And Canada

US – Scheduled event risk from the US docket is significant for the coming week-and-a-half; however, for the next few days, fundamental concerns will be lost in severely constricted liquidity. With the New Year’s holiday, the currency market will see a mass exodus of both bank and speculative capital, exposing the market to potentially high levels of volatility. On Friday, there will be some semblance of normality, but market depth will still be very shallow. In this situation, the presence of a top-tier market moving indicator (ISM manufacturing) could lead to a very volatility reaction from the market should a surprise be in store. The real action, though, happens after the weekend. ISM services, pending home sales, the FOMC’s minutes and non-farm payrolls will quickly ground traders back in fundamentals.

Canada – There are very few Canadian economic indicators scheduled for the coming week – and certainly no releases that have any precedence as market movers. This is a good scenario for a range set up. However, the larger fundametnal trends behind Canada and its currency could still have its way with price action. Statements from policy officials, political uncertainty and the outlook for commodity prices could each have its impact on the market.

Published on  Fri, Jan 2 2009, 05:52 GMT

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