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Pairs to Range Trade

Taking A Short Term Range In Long Term USDCAD Congestion

Fri, Feb 27 2009, 05:49 GMT
by John Kicklighter

DailyFX  |  View company's profile

Congestion has been a common sight for the currency market; but few pairs have shown the consistency in its ranges that USDCAD has. This pair has cut a wide, ascending triangle for more than four months; but the chop within this broad pattern has made it difficult to trade. However, a recently derived ascending trend channel presents a far better setup for range trading.

Why Would USDCAD Hold a Range?

• Levels to Watch:
  -Range Top: 1.3000 (Triple Top)
  -Range Bottom: 1.2400 (Fibs, Trend, SMAs)

• Few pairs have seen the level of congestion that USDCAD has exuded over the past months. Ongoing congestion is certainly supported from a fundamental standpoint. The US and Canada are each others’ largest trade partners. This amplifies the axiom that “when the US catches a cold, the world sneezes.” However, there are still clear fundamental disparities between the two. Safe haven demand, potential for return, and demand for key good are just a few potential drivers.

• We are looking at a congestion pattern within a congestion pattern. USDCAD has been carving an ascending wedge on a hard 1.30 resistance since October. More recently however, we have seen an ascending trend channel take charge. With fibs, a rising trend and SMAs around 1.24, a floor is set.

Suggested Strategy

• Long: Half-size entry orders will be placed at 1.2425 – well enough above recent lows.

• Stop: Our initial stop will be set at 1.2305. This will cover the channel and confluence support. 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 1.2545 and the second is 1.2725.

Trading Tip – Congestion has been a common sight for the currency market; but few pairs have shown the consistency in its ranges that USDCAD has. This pair has cut a wide, ascending triangle for more than four months; but the chop within this broad pattern has made it difficult to trade. However, a recently derived ascending trend channel presents a far better setup for range trading. This formation offers far more precise levels to work around while also using volatility to produce swings that can produce profit potential over a reasonable time frame. The true potential for a good setup in this pair comes from a well-thought out strategy as much as the technicals we are working with. Our suggested approach takes advantage of the steady chop and ascending trend channel through a general bullish bias with a stop that is well below the moving support in the rising trendline. At the same time, the 120 points of risk per lot is significant, so we have reduced position size to lower the notional, potential loss. Beyond a first target that matches risk, our second objective is set above the recent swing high to account for the bullish grade behind technicals. To avoid a sudden shift in market conditions, we will cut any open orders by Friday’s close or should spot hit 1.2650 before we are entered.

Event Risk US And Canada

US – Is the US dollar a safe haven and a future growth leader? This is a question fundamental traders will have to ask going forward as risk trends settle and the demand for yield turns investors back on the path for economic expansion and growing returns. When cashing in on Treasuries, investors will look for growth to precede a rebound in expected returns as competition for funds rises. A look at the US balance sheet now would be discouraging as the economy is accelerating into its slump with ongoing pain in housing, business activity and now especially consumer spending.
However, traders are speculators and look to the future. While US growth is weak, it isn’t necessarily weaker than its global counterparts. With the government introducing a suite of aid to the economy and markets, expectations are growing for the US to recover more quickly than some of its struggling trade partners. Evidence is still a necessary though. Scheduled event risk will play a part in building up forecasts. Tomorrow’s second GDP reading will be a notable report for its components. Next week, consumer spending and income data; employment and business activity will give a broad and timely picture.

Canada – Policy makers’ and traders’ outlooks for the Canadian economy seem to differ considerably. Government officials have suggested the world’s eighth largest economy was on pace to suffer a significant contract with the potential for significant financial disruptions. However, skeptical investors have not seen the evidence in data; and the market’s stability has been a draw for capital. We may see this sentiment change somewhat and volatility pick up over the coming week though as the docket fills out. For this Friday, we have the 4Q reading of the broadest trade report. This in itself is a notable reading, but next week’s data is far more market moving. With the 4Q GDP number and BoC rate decision due early on, the heavy hitting economics will come through first.

Published on  Fri, Feb 27 2009, 05:55 GMT

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