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Pairs to Range Trade

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High Volatility And Looming Breakouts Threaten AUDCAD Range

Thu, Jan 22 2009, 05:41 GMT
by John Kicklighter

DailyFX

Volatility is extraordinarily high for the FX market and a few key currencies have pushed for significant technical breakouts over the past 48 hours. This means range traders are a dangerous proposition; and those setups that are pursued should find a solid foundation in fundamentals, technicals and a strategy.

Why Would AUDCAD Hold a Range?

• Levels to Watch:
  -Range Top: 0.8500 (Pivot, Fib)
  -Range Bottom: 0.8125 (Trend, Pivot, Fib)

• Volatility is extremely high in the currency market and many currencies have either seen significant breaks or are on the cusp of noteworthy moves. For AUDCAD, there is certainly exposure to general risk sentiment as the combination of the high Australian benchmark lending rate and signs that the BoC is heading towards zero have imparted the pair with a clear carry influence. However, each economy is considered a leader in their respective regions.

• With little serious momentum developing behind price swings, congestion is relatively stable for AUDCAD price action. Support is read around 0.8100/25 where a general bullish bias finds a clean trendline to follow. This is further backed by a 38.2% fib retracement and notable pivot that happen to all fall within the same area.

Suggested Strategy

• Long: Half-sized entry orders will be set at 0.8175, aggressive considering the rising trend.

• Stop: An initial stop at 0.8055 should cover a tail that develops from a horizontal range low. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (120) at 0.8295. The second target will be 0.8415.

Trading Tip – Volatility is extraordinarily high for the FX market and a few key currencies have pushed for significant technical breakouts over the past 48 hours. This means range traders are a dangerous proposition; and those setups that are pursued should find a solid foundation in fundamentals, technicals and a strategy. Our AUDCAD looks to answer at least two of these contingencies. From price action, we can see that this pair is firmly set within a trading band that is wide enough to accommodate volatility with significant technical barriers. Since we are looking to keep with the medium-term bias, our only concern is for a long entry on the range. This finds both a general and concise rising trend, the 38.2 percent retracement of the October 8th to January 5th bull wave and strength as a former resistance on price action around 0.8125. To curb our exposure to potential breakouts, we have reduced position size and widened stops. The real risk to this position is fundamentals. There is significant scheduled event risk on deck, but the real concern is risk trends. Though it is dampened somewhat, this pair still has significant exposure to the ebbs and flows in risk aversion that drive the yen and dollar pairs. With this in mind, we will look to cut open orders by Thursday’s close or if spot hits 0.8420 before we are entered.

Event Risk Australia And Canada

Australia – While the Australian economy is still considered one of the strongest in the far East, its clout is nonetheless fading among disillusioned traders. This is largely a condition of speculation rather than data (the fundamentals have shown the Australian economy has been suffering for a while) which is more difficult to gauge as a market driver as such general perceptions do not have starting and ending points as they shift. Nonetheless, we will see this sentiment hang over the Aussie dollar and leverage the currency’s correlation to general risk trends. As for scheduled event risk, most of the major data crosses after the weekend. This Thursday’s import inflation gauge and next week’s producer counterpart is merely a guide to CPI. If inflation plunges towards zero, the RBA can extend its cuts.

Canada – Uncertainty hangs over the Canadian dollar’s future. Can the nation’s economy and financial markets indeed weather the global crisis better than the United States; or is this wishful think that will consistently be discounted through loonie depreciation? These concerns will be partially answered by through developments in business activity going forward – an unpredictable market dynamic. However, there will also be scheduled event risk that could have an immediate impact on volatility as well as a lasting influence on the fundamental outlook for the economy. On deck for the end of the week, we have two key market movers: retail sales and the consumer price index series. Through the most recent growth figures, Canada seems to have actually seen a boost in growth through the second half of 2008, but this is unlikely to last through fourth quarter data.
With November’s retail sales report, we will receive an updated read on consumer spending, a vital component of overall growth going forward. CPI will look to confirm the BoC’s forecasts for inflation to turn negative for two quarters of 2009: but as a confirmation, its impact on the currency will be relatively limited.

Published on  Thu, Jan 22 2009, 05:49 GMT