Long-Term Congestion May Cancel Short-Term Volatility For The USDCAD Range

Why Would USDCAD Hold a Range?   ·         Levels to Watch: -Range Top:       1.2375 (Fib, Range High) -Range Bottom: 1.1770 (Fib Range Low)   ·         Congestion has been the dominant force behind USDCAD over the past few months despite the clear presence of volatility. However, considering the perceived differences between US and Canadian fundamentals, it may not take much of a shift in speculation to turn the market back to trend. For event risk, the real threat to price action comes closer to the weekend. One benefit though, is this pair’s dampened response to broad risk trends.   ·         From a technical standpoint, this pair has taken to broad ranges for nearly three months now, but these formations are starting to interrupt each other and thereby reduce their individual influence on the market. We have recently seen the first lower swing low since last March, so a bearish shift may be under way. Hard levels are somewhat light though.   Suggested Strategy   ·         Short: Half-sized entry orders will be set at 1.2325 which is well within the range of tails.   ·         Stop: An initial stop at 1.2445 is wide enough to give room for another wide-berthed reversal. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (120) at 1.2205. The second target will be 1.2000.

Trading Tip – Though ranges and congestion are prevalent across the currency market, high levels of volatility and early signs of breakouts have imparted a clear sense of risk to range trading. For technical and fundamental considerations, USDCAD’s congestion looks to be among the most stable setups. This pair has seen a sharp rally over the past two sessions; but the advance puts the pair right back into a deeper area of congestion. What’s more, we would usually consider a short-term go against the dominant trend (the bullish advance since the November 2007 reversal); but the extended period of congestion paired with the first lower swing low in months (in last week’s push to 1.1775) lessens the importance of direction at this point. Nonetheless, we are dealing with a volatile market and our range extreme is set on wide tails; which necessitates a distant entry and wide stop. To counter the risk this brings, we have cut our position size in half to keep manageable levels of risk. Our objectives are reasonable, though the second is aggressive should the market settle in the same price congestion from late December. There is considerable event risk through the rest of this week and the outlook for general risk appetite is still up in the air; so we will cancel any open orders before Friday’s event risk crosses the wires.

Event Risk US And Canadian

US – Risk aversion has maintained the dollar’s general appreciation in the currency market thanks to comments from global regulators, but this advance looks like it may be growing winded unless given additional fuel to stoke its fire. However, fundamental influences won’t merely fade into the background; rather we will likely see a shift in interest to scheduled event risk. Looking at the US docket for the coming week, there is more than enough data to feed speculation on the extent of the nation’s recession. From the consumer’s perspective, the advanced reading of January confidence from the University of Michigan and December retail sales report will gauge the health of the economy’s largest sector. The other common theme will take on a whole new meaning for dollar traders. No longer will the import, producer and consumer inflation gauges be read for rate speculation; but now they will be read for stagflation signs. 

Canadian – Since the trade report crossed the wires this morning, there are no significant Canadian indicators scheduled for release through the rest of this week. This will leave traders to speculate on vague and tangential fundamentals for direction on the single currency. However, as the week wears on, speculative trends will take on a more singular interest – the outcome of next Tuesday’s Bank of Canada rate decision. Economists are forecasting a 50 bps cut to 1.00 percent. At this rate, the Canadian monetary authority could easily match its American counterpart near zero – cutting one of advantages the loonie still holds over the dollar.