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Pairs to Range Trade

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USDCAD Range A Quick Setup With High Risk And High Reward

Wed, Mar 18 2009, 05:46 GMT
by John Kicklighter

DailyFX

Much of the currency market has supplanted trends with broad congestion. However, this has not translated into clear ranges; but rather frustrating chop with minor breakouts. USDCAD personifies these conditions with a forceful, rising trend channel that is putting pressure on a much larger technical formation.

Why Would USDCAD Hold a Range?

• Levels to Watch:
  -Range Top: 1.3000 (Range High, Fib)
  -Range Bottom: 1.2670 (Trend, Fib, Pivot)

• It is sound, fundamental reasoning to expect the currencies for two economies whom are each other’s largest trade partners to find a natural buffer to volatility. However, this is only true to a point. In the past, USDCAD price action has seen periods of clear trend and tremendous breakouts. Such conditions may be an issue for this pair going forward as the market weighs the health of risk appetite (and the dollars correlation to such trends) and the presence of event risk from both sides.

• USDCAD has been developing a very wide, ascending triangle formation since October. This pattern produces little pressure of its own; but a rising trend channel starting in January is putting pressure on the need for direction. The rising trend puts a relatively modest floor in around 1.2670.

Suggested Strategy

• Long: Entry orders will be placed at 1.2690 which is follows the rising trend very closely.

• Stop: Our initial stop will be set at 1.2620, which is otherwise tight, but it would confirm a turn. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (70) at 1.2760 and the second is set to 1.2890.

Trading Tip – Much of the currency market has supplanted trends with broad congestion. However, this has not translated into clear ranges; but rather frustrating chop with minor breakouts. USDCAD personifies these conditions with a forceful, rising trend channel that is putting pressure on a much larger technical formation. A breakout is inevitable; but the direction and timing of such a shift is a question that range traders are very interested in. Our strategy for a USDCAD range trade is very risky considering the series of lower highs the market has produced since the unsuccessful push above 1.30 last week. For those with a strong stomach for risk, our strategy looks to control the potential for loss and compensate with the promise of significant return. Our stop is set just below last Friday’s swing low, which is all we need to confirm the pair has broken its consistent, rising trend. Furthermore, this allows for our first target to be set relatively close; and move our cost basis to net profit quickly even in the event of a temporary rebound. The entry on this position should trigger soon as breakout pressure grows with each day; so we will cancel all pending orders by Thursday or should spot hit 1.2775 before our orders are hit.

Event Risk for US and Norway

US – Event risk from the US docket is set with historical market movers; but these are not the indicators of 18 months ago. With the US recession already well-underway and the market actively pricing in much worse to come, the housing and manufacturing indicators that are scheduled for release over the coming days offer little to fundamentally alter the future of the world’s largest economy. Tuesday’s housing starts and next Monday’s existing home sales figures will update market participants on the level of the industry’s recession; but even a notable rebound will be met by skeptical investors as a major turn will be needed before activity in this industry once again contributes to expansion.
The Wednesday’s CPI numbers will have their influence on speculation; but not for rate decisions (as the benchmark is already close enough to prevent further easing). Inflation will now be a defining component of a potential stagflation economy which could fundamentally undermine the economy’s eventual recovery. Finally, Wednesday’s FOMC meeting will be monitored not for rate changes but for announcements of additional and unique efforts aimed at stabilizing the financial sector.

Canada – In an interesting turn of events, the Canadian economic docket is the more market moving for USDCAD – though this potential will manifest itself more in short-term volatility rather than fueling larger fundamental trends.
From the economic docket, the most threatening economic release is Friday’s retail sales report. This indicator has long been a lever for price action; but considering the speculation surrounding the relative economic strength of the Canadian economy (real GDP was still positive year over year through the fourth quarter), a key measure of domestic consumption trends will play a bigger role in the bigger fundamental scheme. Other indicators will tout less importance.
Wholesale sales will be used as a benchmark for retail activity and international capital flows is largely known through market operations. CPI has lost its interest rate influence; but it could nonetheless guide long-term growth.

Published on  Wed, Mar 18 2009, 05:51 GMT