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A Range Trade Opportunity Presents Itself In A USDCAD Trend Channel

Tuesday, 02 December 2008 20:21:14 GMT  |  John Kicklighter, Currency Strategist

Range trades do not necessary have to be pulled from perfectly horizontal periods of congestion. Directional trend channels can be just as distinct and come with less breakout pressure thanks to their bullish or bearish bias. The USDCAD channel that has developed is particularly appealing.

Why Would USDCAD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.2575 (Trend, Fib) -Range Bottom: 1.2300 (Trend, Fibs)   ·         After a couple of months of incredible volatility, USDCAD price action has settled back into a comfortable period of congestion. However, this stability is only six sessions old; so our expectations are reserved. Risk sentiment seems to be less of a driver for this pair (considering the tame dollar price action through yesterday); but scheduled data could be an issue. There are a few releases that are concerning, but Friday’s job numbers will be key.   ·         Congestion underlying USDCAD price action is not the traditional, horizontal range we usually follow. A clear ascending trend channel sets moving targets. Resistance is primarily found in the top of the rising trend channel, which may find confirmation in a notable Fib level. Support can be found at 1.23 as a hard level, but the channel will likely pull that higher. Suggested Strategy   ·         Short: Half-size orders set below the channel top at 1.2550 if the daily bar close below 1.2575.   ·         Stop: An initial stop at 1.2615 is set purposely close to prevent a major loss on a breakout. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (65) at 1.2485. The second target will be 1.2420.

Trading Tip – Range trades do not necessary have to be pulled from perfectly horizontal periods of congestion. Directional trend channels can be just as distinct and come with less breakout pressure thanks to their bullish or bearish bias. The USDCAD channel that has developed is particularly appealing. The ascending pattern is on a shorter time frame, has developed enough volatility to enter a trade and book profit in a relatively short time, and a breakout from the current spot price would come with plenty of warning. However, our suggested strategy does counter the dominant trend; so we have halved our order size. What’s more, though a reversal from the channel bottom would represent an even more appealing setup, we will defer any orders for a long position until spot nears this boundary to ensure price action would develop favorably. Our current strategy much come with a few limitations. We will only consider a short should USDCAD close the day within the channel boundaries. What’s more, all open order will be removed by Friday’s double labor report release.

Event Risk US And Canada

US – The US docket grows more intense as the week matures. However, the next piece of significant event risk is not due until Wednesday (potentially clearing the way for lower volatility until we are entered on our position). The combination of the ISM service sector report and the Fed’s Beige Book will give a good leading/lagging gauge on the US economies health. Market participants will be more interested in speculating on the eventual turn in the economy rather than interest rates at this point with the benchmark yielding only 100 basis points. Friday is key to the fundamental week. The non-farm payroll report is expected to report a massive loss of jobs through the past month (325,000 according to the Bloomberg consensus). This would be a discouraging number even if the market is pricing in a particularly harsh recession going forward.

Canada – Event risk from the Canadian docket could be potentially more market moving than the listings on the US docket. Through the rest of this week, we have two known market movers. Thursday’s Ivey PMI has proven itself to be an influential report in the past as a good gauge of business activity in the Canadian economy, which is then factored in as a growth report. However, with the market’s interests shifting, its impact this time around is questionable. The employment change will almost certainly hold a straightforward influence over price action. Used as an easy to read gauge of growth, this indicator will be measured against the US NFP reading to further leverage its impact. Any open orders will be immune to this risk, but live positions will still be threatened. And, if we are still in a position through the weekend, the following Tuesday’s BoC rate decision will almost certainly trigger another spurt of volatility.

Data for December 3 – December 10			Data for December 3 – December 10
Date	US Economic Data		Date	US Economic Data
Dec 3	ISM Non-Manufacturing (NOV)		Dec 4	Ivey PMI (NOV)
Dec 3	Fed’s Beige Book		Dec 5	Net Change In Unemployment (NOV)
Dec 4	ICSC Chain Store Sales (NOV)		Dec 8	Housing Starts
Dec 5	Change In NFPs (NOV)		Dec 9	Bank of Canada Rate Decision
Dec 5	Consumer Credit (OCT)		Dec 10	Labor Productivity (3Q)

 

 

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

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