pairs to range trade

A Reversal In Risk Doesn't Break The Mature AUDCAD Range

Monday, 24 November 2008 21:58:29 GMT  |  John Kicklighter, Currency Strategist

Over the past few weeks, AUDCAD has been a frequent range trade candidate – and for good reason. This pair has developed one of the most technically-sound ranges throughout the market.

Why Would AUDCAD Stay in a Range?   ·         Levels to Watch: -Range Top:       0.8115 (Trend, Fibs, SMA) -Range Bottom: 0.7825 (Trend, Fibs)   ·         Some of the more risk-sensitive currency pairs have pushed into potential breakout territory over the past 24 hours. To be sure, AUDCAD does have a risk sentiment factor as the pair now has a benchmark yield differential of 300 basis points and Australia is considered a key carry currency while Canada’s economy has been surprisingly stable. At the same, there is some each nation shares a strong commodity link.   ·         Technically, there are no other pairs in the currency market that have shown as dependable a range as AUDCAD. Imbued with the same volatility as the rest of the currency market, but none of its direction, this pair has been forced into a tight wedge/channel. Resistance is our main interest with dominate trend, 50-day SMA and a Fib confluence above. Suggested Strategy   ·         Short: Entry orders will be set at 0.8070 – well within the range and wedge boundaries.   ·         Stop: An initial stop at 0.8140 would is wide, but won’t survive a surge in volatility to false break. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (70) at 0.8000. The second target will be 0.7900.

Trading Tip – Over the past few weeks, AUDCAD has been a frequent range trade candidate – and for good reason. This pair has developed one of the most technically-sound ranges throughout the market. Congestion is marked by a significant wedge that continues to develop into a horizontal trend channel. At the same time, caution must be a priority when working with a range as mature as the AUDCAD’s and while other currency pairs are threatening breakouts across the market.  Our suggested strategy looks to trade with the dominant bear trend; but considering the breakouts other risk-sensitive pairs are experiencing, we likely find little benefit from just trading one side of this pair. Instead, we should be focused on taking advantage of this setup while it lasts. However, we must bow to the expected drop in liquidity (and potentially sharp rise in volatility) with the US holiday during the later half of this week. Therefore, we will cancel all open orders by Wednesday. 

Event Risk Australia And Canada

Australia – Scheduled event risk hits a high gear over the coming week, demanding fundamental caution.  If there were ever a high potential for a breakout from well-established range, it would look a lot like the economic calendar from Australia. The most influential round of data isn’t scheduled until after the weekend; but speculation leading into the actual release could certainly put the market into motion. To start things off, retail sales for the month of October is a known market mover; but in the presence of a scheduled rate decision, spending is a distant second. A 50bp cut is expected, but the room for surprise is substantial. Following that, 3Q GDP will give solid numbers to a considerable amount of speculation. The outlook for Australian economic activity has shifted dramatically over the past few months; and now data will either confirm the dour mood or contradict it (and perhaps setting off a massive reversal). Our open orders will be influenced by 3Q consumer spending and investment – considerable numbers, and perhaps a leading read on GDP.

Canada – The Canadian economic docket could have its way with its namesake currency. For the term of our open orders, our primary concern will be September retail sales. Though this is a lesser reading to overall GDP numbers or rate decisions, it is consistent market mover. For its part, a significant surprise in this report could generate enough volatility for a breakout (especially if the pair is trading near the right range boundary at the time of its release). Beyond that, existing positions will need to handle with the current account balance for the third quarter. Canada depends heavily on trade, so a disappointing reading here could certainly change many perceptions of the economy’s health. Whatever the trade report suggests though, it will be a temporary hold over to next week’s 3Q GDP report. Forecasts call for a significant improvement over the period through September, which could set the country apart.

Data for November 24 – December 2			Data for November 24 – December 2
Date	Australian Economic Data		Date	Canadian Economic Data
Nov 26	Construction Work Done (3Q)		Nov 25	Retail Sales (SEP)
Nov 26	Private Capital Expenditure (3Q)		Nov 28	Current Account (3Q)
Dec 1	Retail Sales (OCT)		Dec 1	Gross Domestic Product (SEP)
Dec 1	RBA Rate Decision		Dec 1	Gross Domestic Product (3Q)
Dec 2	Gross Domestic Product (3Q)

 

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

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