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Pairs to Range Trade

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Momentum and Event Risk Require a Strong CADJPY Range Setup

Tue, Mar 3 2009, 05:42 GMT
by John Kicklighter

DailyFX

Stalwart dollar and yen-based ranges are under pressure, imparting a heightened sense of risk for all congestion-based positions in the currency market. CADJPY is no exception; but with a demanding setup, we can avoid risk and potentially take advantage of a spike in volatility that follows notable event risk.

Why Would CADJPY Hold a Range?

• Levels to Watch:
  -Range Top: 79.40 (Range High)
  -Range Bottom: 75.50 (Pivot, Fibs, Trend, SMA)

• Over the past few weeks, serious doubts over the Japanese yen’s role as a safe haven currency have arisen. An oppressive recession, the potential loss of stability in its markets and a vanishing capital reserve has fundamentally undermined the currency’s role in the FX market. For its own part, the Canadian dollar has retained some of its own leader-of-the pack position in its region – though much of it has faded. The real threat to our range and trend is the looming Canadian event risk.

• There is a broad, yet tentative, CADJPY range that has developed with the pair’s sharp bearish reversal over the past two active sessions. Momentum in the bearish turn is significant, so support will have to work hard. However, multiple Fibs, moving averages, and long-term pivot should hold well.

Suggested Strategy

• Long: Half-sized entry orders will be placed at 75.75, which is just above the notable pivot.

• Stop: Our initial stop will be set at 74.55. This covers the broad confluence and rising trend. 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 76.95 and the second is set to 78.15.

Trading Tip – Stalwart dollar and yen-based ranges are under pressure, imparting a heightened sense of risk for all congestion-based positions in the currency market. CADJPY is no exception; but with a demanding setup, we can avoid risk and potentially take advantage of a spike in volatility that follows notable event risk. First of all, it is important to note that there is substantial risk for this pair from both a technical and fundamental perspective. Looking at price action over the past 48 hours of active trade, we have seen momentum build into a sharp bear wave. Add to this the presence of the Bank of Canada’s rate decision tomorrow; and there is considerable risk of a deeper retracement. However, our entry is above spot, which means we would have to be entered on a reversal from lows. Our position size is halved to allow for a wider stop below the rising trend which allows for volatility. Our primary concern for event risk is the policy decision tomorrow; so a position would ideally make profit before the data hits – but that is highly unlikely. Instead we will cancel any open orders on Thursday or should spot hit 74.50 or 77.50 before we are entered.

Event Risk Australian And Canada

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 held back from pricing in the same pessimism as they draw complimentary comparisons to Canada’s largest trade partner – the US. The sharp drop in 4Q GDP has grounded the loonie somewhat today. At 3.4 percent, the year-over-year contraction in activity is the biggest since the beginning of 1991. This puts Canada closer in line to its global counterparts from a growth standpoint; but what about interest rates? Can the Canadian economy retain a yield advantage for investors to jump on when conditions finally improve? That will be a question that will be fully answered tomorrow with the BoC’s rate decision. Currently, the nation’s benchmark lending rate is a mere 1.00 percent.
Policy officials will have to at least slow the pace of their cuts going forward to support speculation of a positive differential later down the line.

Japan – There are bigger themes at work for the Japanese yen than just a few pieces of scheduled event risk. Over the past few weeks we have seen the foundation of the yen’s role in the market crumble. With the economy contracting at a quick pace and the security of the financial markets under direct scrutiny, we have seen the formerly unquestionable role of the yen as a safe haven taken to task. This is an ongoing process however with many different facets guiding its development. In the meantime, we can prepare for a wave of more mundane event risk. Early Thursday morning in Tokyo, the 4Q capital spending numbers will cross the wires. As an export economy that has long-struggled with consumer spending, this data will be treated as a primary gauge for broader growth trends through the first half of 2009. Other data is of lesser importance and will struggle to rouse the markets.

Published on  Tue, Mar 3 2009, 05:47 GMT