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Pairs to Range Trade

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Event Risk Requires a Quick and Clear USDCAD Range Trade

Fri, Mar 13 2009, 05:38 GMT
by John Kicklighter

DailyFX

There are few viable ranges across the currency market as risk trends shift and fundamentals dive. USDCAD presents a potential congestion setup; but it is fraught with danger and therefore must be tailored to a very specific strategy.

Why Would USDCAD Hold a Range?

• Levels to Watch:
  -Range Top: 1.3015 (Range High)
  -Range Bottom: 1.2725 (Fibs, Pivot, Trend, SMA)

• After a plunge in the Swiss currency this morning leveraged a surge in USDCHF and USDCHF, we can see that the US dollar is pulling back against most of its other, major counterparts. This is largely a move driven by a rebound in risk appetite; but whether this pick up in sentiment is destined to last is questionable. For USDCAD, the trade ties help smooth out any major fluctuations. However, risk trends are difficult to forecast. The heavy Canadian docket on the other hand can be prepared for.

• Technically, USDCAD is set between a rock and a hard place; but this actually heightens the potential for a breakout rather than lowering it. For levels, resistance in the very public 1.30 level was pushed, but not broken. Support has many points of authority but they don’t hold the same prominence.

Suggested Strategy

• Long: Half-sized entry orders will be placed at 1.2755, below today’s lows yet necessarily so.

• Stop: Our initial stop will be set at 1.2655 to cover the range, but it doesn’t hold to volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (100) at 1.2855 and the second is set to 1.2955.

Trading Tip – There are few viable ranges across the currency market as risk trends shift and fundamentals dive. USDCAD presents a potential congestion setup; but it is fraught with danger and therefore must be tailored to a very specific strategy.
Though this pair has a relatively clear zone of congestion to work with; there is significant event risk beginning Friday and continuing into next week. Therefore, our first concern is timing. We will remove any open orders before Friday’s event risk at 11:00 GMT and tighten stops for active positions. Regardless of the direction of the data, we will prepare for high volatility. This is an issue in our tight range; so we have cut our planned position size in half and set stops relatively wide as a cushion. If the market volatility is favorable, our targets are tight enough that they can both be executed before the weekend drains liquidity.
Overall though, this is a risky position and should only be taken by those that are tolerant of such risks.

Event Risk for US and Canada

US – The US docket is populated with a few notable economic releases for the coming week; and most of these figures will feed into speculation of whether the US dollar can support its status as a growth leader and safe haven for global capital. Since the October shock to financial markets, the greenback has rose steadily as investors transfer their ailing account balances into US Treasuries. Further in the past few weeks, the world’s most liquid currency has even overtaken is Japanese counterpart as the top harbor to the rough seas of the global markets thanks to the island nation’s plunge into a severe recession and a lack of policy response from the government. However, the market is also beginning to question safety of funds with the US. Data is pointing to an accelerated recession through the first half of 2009 – and policy so far seems to be changing little. Thursday’s retail sales and Friday’s confidence figures will take vital readings of consumer activity. Next week, factory activity and inflation data will fill out the first half of the week.

Canada – While many other currencies are finding guidance from bigger economic themes, the Canadian dollar traders will be focusing on short-term volatility from an otherwise packed economic docket for the coming week. For the time frame of our pending orders, we are concerned first and foremost with the February statistics for the national employment data. This indicator has long been a top market mover for the currency; but now it is taking the role as the leading indicator for economic activity.
With skeptics of a considerable Canadian recession still lingering in the market; this data will ground expectations in reality. Also scheduled for the same day is the January trade numbers. Whereas the employment data is a sign of domestic (and broader) growth, the trade report is a gauge of health for the vital export sector. Looking beyond the weekend, the focus on growth will increase. The CPI data will lose its inflation correlation and instead be used to monitor the threat of deflation – a common concern for the world’s policy makers now. The retail sales figure is a blatant consumer spending number that will be used to confirm policy officials claims that consumption will cool significantly this year.

Published on  Fri, Mar 13 2009, 05:42 GMT