USDCAD Range One of Few to Hold But Still Highly Risky

How stable is the USDCAD Range? •    Levels to Watch: -Range Top:       1.0750 (Trend, Fib, 100-SMA) -Range Bottom: 1.0450 (Pivot, Fib) •    The fundamental stability of USDCAD was put to the test Friday and this pair would prove itself to be one of the best holdings to weather the uncertainties behind risk appetite. This is not to mean that the pair does not have exposure to the overwhelming driver; but the economic ties between the two nations clearly anchor volatility. No doubt, the turbulence that was whipped up this week could hold through; but next week will also have a dense calendar. •    Like most other majors, USDCAD would see a dramatic swing through Friday that would leave the market scratching its head as to medium-term direction. However, for this pair, the drive wouldn’t force a major breakout that immediately threatened a change in the larger trend. A fib, 100-day SMA and trend confluence near 1.0750 still stands. Suggested Strategy •    Short: Considering the sharp reversal, an entry of 1.0735 is very aggressive - but necessary. •    Stop: Placing a stop at 1.0805 will cover the steady trend but not a change in range. To secure profit, move the stop on the second lot to breakeven when the first target hits. •    Target: The first target is one-and-a-half times risk at 1.0630 (105). The second is 1.0525.

Trading Tip – After suffering a wave of volatility – the level of which we haven’t seen in many months – it seems the currency market is tempering and price action is going back to level of normalcy. However, the incredible price action that was seen through the market shock cannot be discounted for its lasting effects. Fundamentally, the reaction during the low liquidity period may only be the first round. If there is confirmation to fears that Dubai’s stalled debt repayment will be deemed a default or skittish investors turn their fears to what may be the next collapse; the market could easily turn a temporary spike in volatility to a meaningful change in underlying trends. These are not conditions to range trade in as there is inherent risk that cannot be reasonably hedged. For those that are risk-hungry, however, any congestion setups should be as fortified as possible. USDCAD is already established as a relatively stable pair through the fundamental connection between the US and Canadian economies. The general rule of thumb is: how the US performs so does Canada – though there may be a lag. The best test for this trading axiom was response to the volatility that followed this week’s credit crisis. Though USDCAD responded with elevated levels of volatility; the pair would remain within its wedge from the past month. As for a setup, a reduced position is recommended and our entry is set at aggressive levels. By the time we once again reach the level to trigger our short, market conditions should have calmed down. If they haven’t, the orders should be cancelled instead.

Event Risk for the US and Canada

US – Traders were reminded this past week that there is a benefit in the dollar’s station at the low end of the risk spectrum. When there are signs of global distress and fear, the greenback has an intrinsic value as a safe haven. While we have seen this dynamic fade into the background over the months; the Dubai event seems to have given the steady build in exuberant optimism a reason to doubt how far the market can go without fundamentals. Competing for price action, the US docket will also present its own threat to volatility. The upcoming week is filled out with meaningful market-movers like the ISM manufacturing and Fed Beige Book report. Though, there is little doubt that top billing goes to NFPs. Now all we need to discern is whether the risk appetite or tangible fundamentals will be the primary concern next week.

Canada – While the Canadian dollar has taken much of its guidance over past weeks from risk trends, there is little to actually tie the currency to its high-yielding brethren besides its heavy production and export of commodities. Nonetheless, when there is a strong bias in investor sentiment (be it risk appetite or risk aversion), the loonie like all other currencies will fall in line to the primary driver. On the other hand, there is plenty of scheduled event risk on the docket to bring the Canadian dollar back to domestic-based volatility. We will end the week with the 3Q current account reading which will set the tone for next Monday’s GDP release for the same period. And, keeping things busy, Friday’s employment change and Ivey PMI figures for November will end the week with major market-movers.