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Pairs to Range Trade

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A Quick AUDCAD Range Setup Before Heavy Event Risk

Mon, Mar 2 2009, 05:55 GMT
by John Kicklighter

DailyFX

Technicals highlight a strong AUDCAD range setup; but fundamentals can be used to argue just the opposite. With a significant round of market-moving event risk on the docket, this pair may be looking at a breakout next week; but with the proper strategy, we can be in and out with a range swing before the market’s boundaries are tested.

Why Would AUDCAD Hold a Range?

• Levels to Watch:
  -Range Top: 0.8200 (Trend, Fibs, SMAs)
  -Range Bottom: 0.8000 (Fib, Pivot, Range Low)

• For AUDCAD we have to fall back on long-term trends and fundamental drivers. Both currencies back one of the strongest economies in their respective regions. Further helping to manage risk trends, interest rate forecasts for both are starting to take a neutral tinge after a period of significant cuts. However, long-term considerations will certainly be tested by major scheduled event risk. Both Canada and Australia are scheduled to report 4Q GDP numbers and announce interest rate decisions.

• The range we are looking at is very narrow. A 0.82 to 0.80 congestion band encourages volatility and thereby threatens a potential breakout. However, our short interest comes with sound technicals. Not only is a collection of Fibs and SMAs above, but there is also a loose, seven month trend.

Suggested Strategy

• Short: Entry orders will be placed at 0.8170 after liquidity returns next week.

• Stop: Our initial stop will be set at 0.8245. This covers the immediate resistance and trend. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (75) at 0.8095 and the second is set to 0.8045.

Trading Tip – Technicals highlight a strong AUDCAD range setup; but fundamentals can be used to argue just the opposite. With a significant round of market-moving event risk on the docket, this pair may be looking at a breakout next week; but with the proper strategy, we can be in and out with a range swing before the market’s boundaries are tested. First and foremost, we need to note the major market movers on both the Australian and Canadian economic dockets. The fireworks begin on Tuesday during the US session when Canada releases its December GDP numbers to round out the fourth quarter. This is followed quickly by the Australian rate decision, Canadian rate decision and Australian GDP numbers – all within a 24 hour period. This is a dangerous situation for a range that is essentially 170 points wide. For this reason we will look for the position to play out before the data flow starts (and we will cancel any open orders before the first report). To further reduce risk of a breakout around weekend liquidity, we will hold off on placing any orders until the market fills back out on Monday. To further accommodate the trade, we have pulled the second target within the range so that it can take profit quickly.

Event Risk Australian And Canada

Australian – Is the Australian economy one of the strongest in the east? Will the RBA hold its benchmark lending rate at a relatively high level long enough for growth to rebound and draw risk-takers back into the market? The economic docket will shed some light on both of these primary fundamental questions next week. A stocked docket is dominated by two pieces of event risk. The RBA rate decision is the first of the heavy-hitting market movers to cross the wires early Tuesday morning in Sydney.
Recently, speculation has taken a decidedly neutral stance on its forecasts even though commentary and data does little to offset the central bank’s steady pace of rate cuts. The bigger surprise considering expectations would be a bigger-than-expected cut or commentary that clues the market into further reductions, which would work in our positions favor. On the follow day, the 4Q GDP numbers will print. Despite the global recession, the Australian economy is expected to expand at a rather hearty clip through the end of 2008. Strong growth in the face of a world-wide slump would imbue the Aussie dollar with an overwhelming bullish status; but now the bar is set high.

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. From the three pieces of event risk due next week due next week, each is a notable market mover. Both the Ivey and GDP numbers will be second class figures. The quarterly growth number is just rounding out monthly reads; and the business activity report is leading but highlights an already depressed sector. The rate decision holds real potential. Is the BoC done or will they follow the Fed closer to zero?

Published on  Mon, Mar 2 2009, 05:59 GMT