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Recent volatility may seem to render EURCAD an unusual range trade candidate, but this pair is certainly trading in a band – just a wide one. With more historical data, the range high becomes very apparent in the falling trendline from 2004 (but that really developed from the swing high from this past April).

Why Would EURCAD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.6225 (Trend, Swing High) -Range Bottom: 1.5475 (Fib, Pivot, SMA)   ·         Though it is very wide, the EURCAD is coming up on its range extreme. The fact that this pair is cutting such an expansive zone offers some buffer from the day-to-day volatility that has proven dangerous for traders over the past few weeks. Fundamentally, any imbalance for risk sentiment that comes up could have an exaggerated impact on this pair as Canada is considered a relatively safe economy while the Euro Zone’s pain is just coming to light.   ·         Technically, it may seem outrageous to deem EURCAD as range bound, but it just matters what frequency you look at price action. Though day-to-day volatility is very high, if you look at six months worth of price action, a notable trend, and range high around 1.6175/225 comes clear. Support on the other hand is far less meaningful.    Suggested Strategy   ·         Short: Looking at a longer-term trade, we would consider 1.6180 the optimal entry. ·         Stop: Stops must be set wide considering the time frame and price action this range is derived from. Initial support would be best at 1.6340, but we will trail the second lot stop to breakeven. ·         Target: As always, the first target will equal risk (160) at 1.6020.  Second target is 1.5860.

Trading Tip – Recent volatility may seem to render EURCAD an unusual range trade candidate, but this pair is certainly trading in a band – just a wide one. With more historical data, the range high becomes very apparent in the falling trendline from 2004 (but that really developed from the swing high from this past April). This is a shallow trend and further supports a horizontal range high around 1.62. At the same time, we cannot ignore volatility, and it that respect wide stops are a necessity. To keep risk on this position reasonable, we will reduce position size. There are different ways for trading this pair, but our strategy is looking for an aggressive entry to lower risk considering this wide range and high volatility. Another key element in this setup is timing. Though this is a longer-term layout, market conditions can change quickly in today’s markets; so we will cut all lingering orders Friday.

Event Risk Euro Zone And Canada

Euro Zone – The Euro Zone is in the same boat as most of its major counterparts – risk has altered the fundamental outlook for the economy and interest rate expectations. In the past few weeks and months, growth forecasts have deteriorated to near certainty of an impending recession. More importantly, after the ECB lowered rates last week in the coordinated policy easing, there is no longer a hold out in inflation for a potential argument for rate hikes. Today, ECB President Trichet suggested the bailout was completely necessary and that he expected inflation to temper with the downturn in growth. Where does that leave us with this coming week’s event risk? The Euro Zone CPI and German PPI numbers will likely have little to no influence on price action. Besides these numbers, there is no other data of significance due.

Canada – Considering the global credit crisis, the Canadian financial system and economy have proven to be the most resilient of the G10. However, this hasn’t translated into capital looking for safe haven in Canadian investments though as liquidity is considered otherwise lacking for the bank. The level of risk and liquidity in the global markets will certainly be the primary driver for the loonie going forward; but data will also have its place. Another key for the currency will be interest rates (the return portion in fundamental foreign exchange trading). This will be the highlight next week when the Bank of Canada delivers its rate decision. After cutting its benchmark lending rate 50bps, the market is now forecasting another quarter-point easing to head off a worst recession going forward.

Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? Send them to John at jkicklighter@dailyfx.com