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Pairs to Range Trade

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A Low Risk Profile And Clear Congestion Set Up A Wide AUDCAD Range

Wed, Jan 28 2009, 05:53 GMT
by John Kicklighter

DailyFX

It is still slim pickings for range trades in the currency market. While volatility has settled somewhat, the too many pairs are threatening to force breakouts and revive long-term trends. AUDCAD is a notable exception from a technical standpoint, but this pair nonetheless comes with its own risks.

Why Would AUDCAD Hold a Range?

• Levels to Watch:
  -Range Top: 0.8500 (Pivot, Fib)
  -Range Bottom: 0.8000 (Trend, Fib)

• Risk appetite is holding a heavy hand over the currency market. Though there is currently no clear direction behind risk aversion or appetite, the potential for significant breaks and trend resumption is obvious. AUDCAD will likely avoid all but the strongest swings in sentiment as it has in the past. Scheduled event risk on the other hand may be more difficult to avoid. A rate decision, GDP and other figures mark significant land mines.

• It can be said that AUDCAD is in an ascending wedge formation, but it is so flat as to essentially be a range. The rising floor on this congestion meets Fib confluence around 0.8000/35 establish a bottom that was confirmed in a prominent reversal candle Monday. A 0.8175 pivot level may slow things down, but true resistance doesn’t come in until 0.85.

Suggested Strategy

• Long: Half-sized entry orders will be set at 0.8050 – easily achievable.

• Stop: An initial stop at 0.7930 is wide enough to cover the trend and the average tail. 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 0.8170. The other is 50% of the swing at 0.8335.

Trading Tip – It is still slim pickings for range trades in the currency market. While volatility has settled somewhat, the too many pairs are threatening to force breakouts and revive long-term trends. AUDCAD is a notable exception from a technical standpoint, but this pair nonetheless comes with its own risks. For starters, there is considerable event risk on the economic docket – including a Reserve Bank of Australia rate decision due next Tuesday and Canada’s employment data due a couple days later. Before that time there are more than a few top tier indicators dotting the calendars to be concerned. Alternatively, there is far less concern from this pair when risk trends come into the picture – which is a considerable benefit when such a prevailing trend holds the future of so many trends within the currency market. To curb our risk, we tailored our strategy somewhat to fit technical and fundamental considerations. Our entry is well below spot, but also holds a good range above support. This will prevent us from ‘chasing the market’ while simultaneously giving us a buffer should a piece of event risk spark volatility and knock us in. Furthermore, our stop has been set wide enough to account for our trend and the potential for a sizable tail. With a busy docket ahead, we will cancel any open orders by Thursday or should spot hit 0.8250 first.

Event Risk Australia And Canada

Australia – The Australian dollar is a magnet for fundamental speculators for the next two weeks. Risk trends are perhaps the most threatening dynamic for the currency as we cannot see such tides rise ahead of time. Nonetheless, as one of the highest yielding currencies among the G10 and with an economy that has considerable exposure to global growth trends (thanks to a heavy export base for natural resources), the Aussie dollar will no doubt respond to any market-wide shift in fear or greed. A more definable threat for stability will be the economic docket. There is a full list of indicators penciled in and accented by the RBA’s rate decision next Tuesday. For the rest of this week, we need to be concerned with advanced leading economic composite reports, sector activity gauges and fourth quarter consumer inflation figures. As a key factor for rate decision, the price gauge could be particularly market moving.

Canada – Standing in direct contrast to the Australian calendar, the Canadian docket is otherwise thin for the coming week. The only notable economic release for the expected period this position takes to unfold is the November gross domestic product report. While growth numbers are growing in importance as the global recession picks up, the monthly reading is often overlooked by the market. However, this may not be the case going forward. Until recently, economists and market participants were pricing the Canadian dollar as if it would largely avoid the recession and rate cuts that the rest of the developed world was facing. With the BoC having already lowered the benchmark rate to 1.00 percent and the policy officials forecasting an unavoidable, domestic recession, this sentiment is clearly on the ropes and the Canadian currency could suffer for it.

Published on  Wed, Jan 28 2009, 06:00 GMT