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Pairs to Range Trade

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A Choice of Risk Appetite Must Be Made For An AUDCAD Range Trade

Mon, Mar 30 2009, 05:45 GMT
by John Kicklighter

DailyFX

Though congestion is a common attribute for the broader currency market at the moment, there are few ranges that offer clear levels and a reasonable risk profile. AUDCAD offers one of the few appealing setups; but the risk is significant.

Why Would AUDCAD Hold a Range?

• Levels to Watch:
  -Range Top: 0.8650 (Fib, Double Top)
  -Range Bottom: 0.8000 (Pivot)

• Checking over the economic calendars for both Australia and Canada, there is significant event risk from both sides of the market; however, whether they are actual market movers or not is another issue. From Australia, housing, credit, consumer spending, trade and PMI numbers give a rounded view of the economy’s health. Canada, on the other hand, has only its monthly GDP report to worry about. And, though there is no direct exposure, G20 volatility will be fully expected.

• Like a few other notable pairs in the market, AUDCAD is developing a very wide range but is at the same time backed by a clear tide of momentum. There is a notable 50% Fib level that confirms the double top at 0.8650. On the way down there are many, ill-defined levels to trip up a pull back.

Suggested Strategy

• Short: Half-size entry orders will be placed at 0.8635 to account the past week’s range.

• Stop: Our initial stop will be set at 0.8720 which is wide enough to cover the double top. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (85) at 0.8550 and the second target will be 0.8400.

Trading Tip – Though congestion is a common attribute for the broader currency market at the moment, there are few ranges that offer clear levels and a reasonable risk profile. AUDCAD offers one of the few appealing setups; but the risk is significant.
Since anything can happen over the weekend and there is substantial event risk scheduled for the latter half of next week, we will layout both an aggressive and cautious approach to attempting a range with this pair. However, regardless if we take the ‘safer’ route or not; there is breakout risk to this setup. With so much bullish momentum behind the past month’s trend, a breech above 0.8650 would not be too difficult to force. Therefore, we have decided to use half size orders and set stops relatively wide for both cases. Our suggested strategy is actually the more risky setup. An aggressive entry at 0.8635 will require a bounce that puts us very close to resistance (a level that if tested too many times is likely to break). The stop is easy enough to set; and our first target covers risk and falls within the rising trend channel that has developed since Feb 27. Our cautious setup would be to wait for the rising trend channel to break. This should be through a confirmed close of a medium time frame bar (60, 240-minute bars) below support in this formation now around 0.8540. A stop should follow any natural slow developing, the first target set equal to risk and the second can be far more aggressive due to its breakout nature. With regards to the G20 meeting on Thursday, we will make sure to close all open orders by Wednesday night to avoid this.

Event Risk for Australia and Canada

Australia – There is an over abundance of scheduled event risk on the Australian docket next week; but there is some doubt as to whether it can genuinely move the market. Starting off immediately on Monday morning in Sydney, the HIA new home sales report will offer a fresh reading on the so-far still strong housing market in Australia. This will be further confirmed by the building approvals due Wednesday and AiG construction activity report released the following Monday. Taking a read on the business sector, the trade balance and AiG factory and service activity numbers will offer a broad snapshot for price action.
Finally, we will follow the consumer through private sector credit and retail sales. Altogether this can curb or support recent speculation that the Aussie economy is perhaps the strongest in the industrialized (a title that would be made all the more impressive considering the country’s benchmark lending rate).

Canada – The economic winds will die down for Canada next week. The only notable economic report due for release is the monthly gross domestic product number for January. Recent data and forecasts from policy officials has weighed the potential for output from Canada substantially; but such dour forecasts are still not directly reflected in the objective data. Should this figure disappoint, it would be another notch against the loonie. Looking at Canada’s entire risk dossier, data isn’t the only concern next week. In the countdown to the G 20 summit meeting in London, Finance Minister Jim Flaherty and Prime Minister Stephen Harper have been especially vocal about what needs to come out of the meeting of leaders. We will see if their presence on the newswires translates into action.

Published on  Mon, Mar 30 2009, 05:50 GMT