pairs to range trade

A Wide Range May Hold USDCAD Through Thin Markets

Friday, 19 December 2008 16:58:57 GMT  |  John Kicklighter, Currency Strategist

Currency market liquidity is already thinning out going into the end of the year, curbing momentum behind trends like the dollar’s recent pullback. While volatility may still be an issue through the next few weeks, USDCAD has enough room in a broad wedge to hold up range activity until the market fills back out.

Why Would USDCAD Hold a Range?   ·         Levels to Watch: -Range Top:       1.3000 (Fib, Triple Top, SMA) -Range Bottom: 1.1800 (Trend, Fib, SMA)   ·         Volatility has been extraordinarily high over the past week, yet the year-end period historically sees a sharp drop in liquidity. Under some circumstances, these are conflicting influences for how price action will be shaped over the next two weeks. Regardless, thin markets mean it is very hard to develop momentum, so producing major breakouts is difficult. So while volatility will be high with US event risk, the USDCAD’s broad range will be sturdy.   ·         Just two weeks ago, USDCAD broke a sharp rising trend that was putting pressure on the triple top around 1.30. After stopping out the significant retracement though, we have found another, broader wedge that is based on the rising trend from the Oct 14th swing low and 38.2% Fib from May to November at 1.18 - a lot of range to work with.   Suggested Strategy   ·         Long: Half sized entry orders will be set at 1.1875 – well above the hard level of support.   ·         Stop: An initial stop at 1.1725 is wide enough to cover the rising trend in the wedge formation. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (150) at 1.2025. The second target will be 1.2325.

Trading Tip – Currency market liquidity is already thinning out going into the end of the year, curbing momentum behind trends like the dollar’s recent pullback. While volatility may still be an issue through the next few weeks, USDCAD has enough room in a broad wedge to hold up range activity until the market fills back out. Recently, this pair has seen a very clear wedge formation that began with the late-September swing low give way and lead to the deep retracement experienced through the first half of the week. However, the pressure behind this formation was especially urgent and required resolution before the market settled and many traders left for the year. In contrast, the new wedge that has developed has little strain in a 1200 point range. So, while high volatility may keep excessively high through the period, the lack of momentum the market is able to generate and stability of the surrounding technical levels will encourage the development of range conditions. Our strategy accounts for the wedge and volatility with a long-only outlook, a wide stop and reduced position size. We will cancel open orders by next Wednesday or should spot hit 1.2650 before we are entered. 

Event Risk US And Canada

US – For a holiday period, the US docket is abnormally busy next week. Most of the scheduled event risk is set for the first half of the week. On Tuesday, the final reading on 3Q GDP will cross the wires. As we would expect from a final reading, it is a second reversion that does not often see a significant change. However, a notable adjustment to any of the more important component readings could certainly impact a fundamental base that is more concerned about how quickly the US can recover from its own recession compared to its major counterparts. Also due that day is a trio of housing indicators. Housing prices, new home sales and existing home sales will give a broad reading on the original catalyst for the economic downturn. With credit still non-existent for Americans and confidence tumbling to new lows, the outlook is not good. On the following day, business and consumer spending comes into focus with personal spending and durable goods figures. Beyond the scheduled event risk, the dollar’s place as a safe haven will also be fiercely debated.

Canada – The Canadian economic docket will thin out considerably over the coming week. The only piece of scheduled event risk however holds a considerable level of potential for market reaction. While the gross domestic product reading for October is only a monthly gauge, it nonetheless will give the first realistic speculative fodder for fourth quarter GDP. After the strong performance of the economy through the previous quarter, forecasts for Canada officially entering a recession is still a clear flashpoint for long-term fundamentals. Outside of this report, there will also be the ongoing correlation with commodities. However, these markets will be similarly thin, and the economic relationship between the US and Canada will help to smooth over any major fluctuations in surprises.

Data for December 22 – December 29			Data for December 22 – December 29
Date	US Economic Data		Date	Canada Economic Data
Dec 23	GDP Annualized (3Q F)		Dec 24	Gross Domestic Product (OCT)
Dec 23	New Home Sales (NOV)
Dec 23	Existing Home Sales (NOV)
Dec 24	Personal Spending
Dec 24	Durable Goods Orders

 

 

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