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Pairs to Range Trade

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A Clear AUDCAD Channel Sets Up A Strong Range Should Momentum Turn

Wed, Feb 4 2009, 05:45 GMT
by John Kicklighter

DailyFX

Viable ranges are few and far between for the currency market; and those that are around are being threatened by significant event risk. AUDCAD has both volatility and economic releases working against it; but a sound strategy could set up a strong trade.

Why Would CHFJPY Hold a Range?

• Levels to Watch:
  -Range Top: 0.8015 (Trend, Pivot, Fib, SMA)
  -Range Bottom: 0.7735 (Channel Bottom, Fib)

• The first wave of event risk for AUDCAD has come and passed. The RBA rate decision held considerable market potential; but the event would merely sustain a pre-established trend. There is still plenty of scheduled event risk on the economic docket; but the only high level release is Friday’s Canadian labor report. Aside from the scheduled data, there is a modest correlation to risk trends in this pair; though that too has been relatively mute.

• AUDCAD congestion comes with a bias. A descending trend channel has established boundaries for the pair’s steady rallies and declines since the bearish reversal back on the 19th. A short bias clearly aligns itself to market direction. Adding weight to a potential reversal, we also have a 38.2% Fib, 50-bar SMA and pivot all falling around 0.8015.

Suggested Strategy

• Short: Entry orders should come on a trend break, but hard levels can be set at 0.7985.

• Stop: An initial stop at 0.8045 is tight as this set up is based on the trend channel alone. 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 0.7935. The second objective is 0.7835.

Trading Tip – Viable ranges are few and far between for the currency market; and those that are around are being threatened by significant event risk. AUDCAD has both volatility and economic releases working against it; but a sound strategy could set up a strong trade. The first thing to note with our strategy is that the entry is a hard level for a short; yet momentum has not turned from a very consistent trend. A hard entry should only be taken by those that believe a reversal is inevitable at this level; otherwise, a confirmed turn from a short-term trendline break would be the better approach. Other notable components of our setup are a close stop and rather reserved target. A stop at 0.8050 is very close; but since are primary formation is the falling trend channel; we would not want to be in this position should resistance start to break as it would change the technical layout.
Our first objective equals risk as usual, but our second target does not look to take advantage of the falling channel formation as we do not want to press our luck or stay with the trade for too long (and allow momentum to die out). We will cancel all open orders and tighten stops on existing positions before Friday’s Canadian employment report.

Event Risk Australia And Canada

Australia – The Australian indicator with the greatest market moving potential (the RBA rate decision) has come and gone; and there is little reason to believe it will have a lasting influence on volatility. However, this does not mean that the currency is in the free and clear from fundamental influence. There is actually considerable risk on the docket ahead. Tonight, we will see the frequent volatility stoking retail sales report for December. Few indicators are as accurate in gauging the consumer’s contribution to overall growth as this one; so this indicator may very well decide direction in the short-term wedge that has developed since Monday’s reversal. For the rest of the week, only the RBA Quarterly policy statement will populate the top tier for economic data; but considering the RBA has already announced rates, expectations for a reaction are reserved. Outside of the calendar, the Aussie dollar’s correlation to general risk trends may also present a threat to price action. An eye should be kept on USDJPY and the Dow for guidance on sentiment.

Canada – In contrast to the Australian docket (which is cooling as time goes on), the Canadian calendar presents growing risk as the week wears on. Thursday brings the Ivey PMI report for January. A sound reading for business activity, this indicator will help adjust the outlook for the nation’s recession; but its influence on general growth and immediate loonie volatility will be trumped by the labor data due Friday. A consistent, top market-moving indicator, the employment report can gauge the consumer’s contribution to the economy and offer a direct comparison between Canadian and US health. This is certainly an indicator to avoid – especially if there is the potential for an unfavorable breakout before its is released.

Published on  Wed, Feb 4 2009, 05:50 GMT