pair to range trade

A Clear USDCAD Congestion Pattern may be Unsettled by Holiday Trading

Large and prominent ranges are a common site across the currency market; but it is this market-wide trend coupled with rising concern over the direction underlying risk appetite may taken in the days and weeks ahead that warrants caution in trading these seemingly benign setups.

How stable is the USDCAD Range? •    Levels to Watch: -Range Top:       1.0775 (Trend, SMA, Pivot, Fibs) -Range Bottom: 1.0425 (LT Range Bottom) •    There is plenty of event risk over the coming week; but is it necessarily enough to redefine USDCAD’s long-term bear trend? The abbreviated week for US markets due to the Thanksgiving holiday concentrates an already dense round of scheduled event risk. From the US side, the second reading of 3Q GDP, consumer confidence, durable goods and home sales are market worthy. Canadian retail sales is the only notable reading until the following week. •    The past four days have seen a significant upswing for USDCAD; but momentum will soon come into conflict with heavy resistance. A descending trend of lower swing highs that began back in August is the most prominent technical level above. This trend is further backed by major fib confluence and a 100-day SMA to set resistance at 1.0775/800. Suggested Strategy •    Short: A clear scenario of a hold and potential reversal will lead us to set entry at 1.0770. •    Stop: In a stop of 1.0850, we don’t cover the October swing high; but it does keep the trend.. To secure profit, move the stop on the second lot to breakeven when the first target hits. •    Target: The first objective is one-and-a-half times (120) at 1.0650. The second is 1.0530.

Trading Tip – Large and prominent ranges are a common site across the currency market; but it is this market-wide trend coupled with rising concern over the direction underlying risk appetite may taken in the days and weeks ahead that warrants caution in trading these seemingly benign setups. For USDCAD, the usual fundamental buffer of two economies that are very closely tied by trade does not overwhelm the influence that risk appetite has on the US dollar. This currency has been fundamentally and technically battered in what has been an incredible and perhaps unjustified bull run for the capital markets this year. If one of the major, risk-sensitive market benchmarks starts to develop a meaningful reversal; it stands to reason that the high correlation between assets will encourage a wave of unwinding risky positions. Market conditions make for a difficult read with a foreshortened US trading week warping liquidity and a leveraging the presence of event risk. Our strategy must take this into account; and to do so, we need to add a discretionary component to entry. It should be clear that USDCAD and general risk appetite will hold off from a major trend reversal before we enter. This will probably be gauged by watching other dollar pairs, yen crosses and equities for guidance. If there be what looks like a potentially unfavorable breakout in any of these, it may just be a matter of time before USDCAD catches up.

Event Risk for the US and Canada

US – The outlook for the US markets next week is unusual. We have a broad range of economic data; but liquidity will suffer due to the extended Thanksgiving holiday weekend that begins Thursday. Often times, when there is a heavy docket, the market avoids establishing major trends as the impending release could catalyze a move in the opposite direction to a newly establish trade; and the actual indicators themselves frequently fail to live up to their market-moving hype. On the other hand, the shallow market depth will leverage the presence of speculators (as opposed to banks, money managers and those with more stable positioning) which can inadvertently encourage sharp moves. As for first three days of active trade, the calendar is heavy with meaningful releases. Among the more common market movers are existing and new home sales, personal income and spending, durable goods orders and consumer confidence. However, the second reading of 3Q GDP may hold a significant sway over volatility on its own given a potential revision.

Canada – In comparison to its US counterpart, the Canadian economic docket is relatively light over the coming week. Top event risk before the weekend Monday’s retail sales report for September. This indicator has proven itself to be market-worthy in the past; and a significant change for the month can have a last minute impact no broader growth forecasts. On Monday November 30th, the data peaks with September and third quarter GDP readings. The monthly reading is trumped by the quarterly reading as that is measurement that will be used to compare the nation’s health to its peers. Aside from event risk, there is a lingering supposition that this currency has followed genuine carry currencies too closely through its commodity ties. This leverages the influence of risk appetite.

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