Sell AUD/CAD Below Support at 1.0233

The Aussie-Loonie pair has congested above a strong level of support at 1.0233, an exchange rate the pair hasn’t closed below on consecutive days since April 26. While the pair has been in a clear upward trend since last November and in an even sharper ascending channel since the yearly low on March 17, the AUD/CAD pair has been mostly range bound since May, and depreciating steadily since June 6. That being said, a break below the aforementioned support suggests a sharp move lower over the third quarter of 2011. With the critical U.S. nonfarm payrolls scheduled to be released tomorrow, any signs of improving health of the U.S. economy will boost the Loonie.

Levels to Watch:

-Range Top: 1.0668 (Trend)

-Range Bottom: 0.9848 (trend)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The chart below shows the Fibonacci extension and how the AUD/CAD pair trade could unfold over the coming days, off of the May 11 Low at 1.0192, the June 6 High at 1.0555 and the extension to the June 23 Low at 1.2333.

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

• Short: Place an entry at 1.0233 (0.0 Fibo)
• Stop: Set the stop to 1.0332 (99-pip risk, 23.6 Fibo, 20-DMA)
• Target: The first target is 1.0165 (100-DMA, 1.0233, 0.0 Fibo), second target is 1.0035
• Timeframe: 7- to 14-days

Trading Tip – The AUD/CAD pair has been congested in a small 160-pip range over the past three-weeks, and given the downward bias, the suggest a breakout to the downside may be on the horizon (that’s timeframe, however, is longer than the 14-days outlined previously). Because the pair hasn’t posted two consecutive daily closes below the 1.0233 support, a small short order there is suggested, following by adding to the position should the AUD/CAD pair close below said level on consecutive days. Because of the congestion recently, the daily technicals utilized in this piece are fairly neutral. However, the 6-hour chart paints a different picture. The 6-hour RSI is falling, from 62 yesterday to 50 today. Similarly, the MACD Histogram is narrowing out of its bullish divergence, with the differential at a mere +3. The Slow Stochastic oscillator suggest further losses, with the %K less than the %D, at 61 and 74. Should U.S. nonfarm payrolls beat expectations tomorrow, I believe we could see significant Loonie strength across the board, including in the AUD/CAD pair, for at least Friday’s session.

Event Risk for Australia and Canada

While Australia has no significant data due tomorrow, but with American and Canadian labor market readings on the docket, there will likely be unusually high price action for the AUD/CAD pair on a Friday.

Australia – Australia has some significant data due next week, at the end of the Asian session on Monday, with home loans and investment lending data due. Investment lending declined in April, which was one of a few reasons why the Reserve Bank of Australia remained dovish following the rate decision on Tuesday. The Aussie, however, will move at the will of speculators depending on their tolerance for risk, especially tomorrow, ahead of U.S. nonfarm payrolls.

Canada – After Thursday’s round of strong data out of Canada – the housing sector and manufacturing sector showed signs of improvement – the Loonie is reaching a critical juncture tomorrow with its own labor market data due ahead of U.S. nonfarm payrolls. The Canadian economy is forecasted to have added another 15K jobs in June, with the unemployment rate on hold at 7.4 percent. The Canadian economy remains the only industrialized nation to have regained and added jobs it lost during and after the recession.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report or be added to his distribution list, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX