bio2

High Risk In A Remarkably Clear USDCAD Range Test

Friday, 05 December 2008 17:11:53 GMT  |  John Kicklighter, Currency Strategist

The triple top that has been carved out by USDCAD is textbook. However, a range trade based on this formation is very risky considering the steady momentum behind the bullish, dominate trend and the fact that spot is settling right on a major technical level just before the weekend.

Why Would USDCAD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.3000 (Triple Top) -Range Bottom: 1.2100 (Fibs, Pivot)   ·         Today’s employment reports from Canada and US suggest the neighbors are in the same fundamental boat. Onrushing recessions, monetary policy aimed at promoting growth, and national stimulus packages are issues dominating the landscape for both economies.  This will help dampen the development of major trends; but breakouts are still a high threat. Most notably, event risk like the BoC decision next week can spark a short-term drive.   ·         The technical setup in USDCAD is blaringly obvious; a fact which may encourage the market to break up the formation. The market is now starring down a major triple top at the round 1.30 level. The independence of these three tops is practically the definition of a triple top. At the same time, a rising trend is still in place and carving a perilous wedge. Suggested Strategy   ·         Short: Entry orders will be set at half size at 1.2950, which is just below the triple top.   ·         Stop: An initial stop at 1.3075 gives a significant buffer but is still close to avoid 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 (125) at 1.2825. The second target will be 1.2600.

Trading Tip – The triple top that has been carved out by USDCAD is textbook. However, a range trade based on this formation is very risky considering the steady momentum behind the bullish, dominate trend and the fact that spot is settling right on a major technical level just before the weekend. What’s more, when a technical setup is as clear as this, this is often an effort made to force the key level to trip close stop and entry orders to catalyze volatility. To counter this significant risk, our strategy has to be one of caution first and foremost. First off, we are reducing our position size to half as we are going against medium-term momentum and our stop is relatively wide. The exit level has been widened to account for volatility near these highs; but significant tails have been absent in the past and we don’t want to expose a position to too much risk when the probability of a breakout is so high. Additional steps need to be taken for trade management. We will not place our entry orders until after the weekend; so that we can make sure there isn’t an immediate drive for a technical with the return of liquidity. Further, we will cancel any open orders, and tighten stops on existing positions, before the BoC’s rate decision.

Event Risk US And Canada

US – The economic docket has had little influence on the whims of the US dollar. With conservative policy groups confirming a US recession (market participants are projecting the worst slump since the second world war), interest rates pulled down to within arms reach of zero and confidence among US consumers expected to tumble to historic lows, there is an overwhelming shroud of bearish sentiment surrounding the US economy. However, the world’s largest economy isn’t alone in this despair and that fact alone has kept the dollar buoyant. An absence of return is pushing capital to bastions of safety; and the United States title as the largest economy with the most liquid markets has kept investors sights set on its assets. This fact is not likely to change soon. For the same reason, event risk from the US docket is likely to encourage little response from price action. Import and producer-level price growth is expected to drop into deflationary territory – though rates are already near zero. Consumer confidence and spending have likely been priced in.

Canada – While the global recession and financial crisis has a presence in Canada, there is still the belief that its economy is doing far better than most of its global counterparts. This has been reflected in the recent growth reading (as well as more timely sector reports) and a relatively tame pace of monetary easing. Such optimistic convictions in an otherwise bearish universe leave this currency open to surprise. Taking this into account, the key to economic event risk next week is the Bank of Canada’s rate decision. The policy authority is expected to lower its benchmark by 50bps to 1.75 percent, which would keep their pace restrained (compared to the Fed, BoE, RBA, etc). If there is a sharper cut, it would open the door to near zero rates in line with the Fed and could dissolve confidence in the loonie.

Data for December 8 – December 15			Data for December 8 – December 15
Date	US Economic Data		Date	Canadian Economic Data
Dec 11	Import Price Index (NOV)		Dec 8	Housing Starts (NOV)
Dec 12	Producer Price Index (NOV)		Dec 9	Bank of Canada Rate Decision
Dec 12	Advanced Retail Sales (NOV)		Dec 10	Labor Productivity (3Q)
Dec 12	U. of Michigan Confidence (DEC P)		Dec 11	International Merchandise Trade (OCT)
Dec 15	Industrial Production (NOV)		Dec 11	New Housing Price Index (OCT)

 

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars