EUR/CAD Range Dependent On Risk Trends

Trading Tip – Trending markets have made selecting an ideal range difficult and a week of event risk only adds to the uncertainty. The upcoming U.S. Non-farm payroll release will be an important driver of broader volatility and which way the risk winds blow. The labor report for the world’s largest economy could also determine which side of the fence traders should chose, when deciding between the two risk correlated currencies. If as expected job growth returns for the first time since the credit crisis began then Canadian dollar support should outpace that of the Euro as its domestic economy is dependent on U.S. demand which would go against our current set-up. However, traders must also account for the Canadian labor report which simultaneously cross the wires and could cloud the reading on the impact of a developing broader trend. Although current support could prove formidable, the lack of reinforcement increases makes taking advantage of another test risky. That is why our entry is set-up to participate in a developing bullish trend which has enough upside to generate the required profits for our level of risk. Traders may also need to look beyond any volatility generated by ECB rhetoric following their rate decision, unless it is establishing a clear shift in policy, as any new trend may be short lived with the U.S. event risk to follow.

Event Risk for the UK and US

Euro-Zone – The European central bank is expected to leave their benchmark rate unchanged at 1.00% as there has been very little in the way of fundamental data to change their stance. Inflation rose to 0.9% in December but remains well below the ECB’s 2.0% target which will allow policy makers to focus on promoting growth without jeopardizing their price stability mandate. Indeed, we saw signs that the region’s economy is slowing with January’s purchaser manger’s composite index of manufacturing and services falling to 53.7 from 54.2. Flat retail sales during the holiday season add to the case for keeping rates exceptionally low for the foreseeable future.

Canada – Canadian manufacturing and employment data to end the week will present a significant amount of domestic event risk. The Ivey PMI gauge is expected to improve to 53.0 from 48.4 signaling expansion in the manufacturing sector which is in line with improvements in Europe, China and the U.S. Increasing output domestically and abroad should continue to be supportive of raw materials - a main source of growth for the Canadian economy. Demand from emerging markets has helped offset weakness from American consumers which has helped firm the labor market. Early forecasts are for the economy to have generated 15,000 in January which would be the fourth positive month in the last six.