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USD/CAD Channel Convergence Creates Range Opportunity

USD/CAD Channel Convergence Creates Range Opportunity

2010-03-04 20:39:00
John Rivera, Currency Analyst
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0304rt1

How stable is the USD/CAD Range?
Levels to Watch:
-Range Top:       1.0500 (Psychological, Trend)
-Range Bottom: 1.0250 (Pivot, Trend)
•Strong Canadian fundamentals, increasing optimism and a tinge of hawkishness in recent BoC comments have helped fuel “loonie” support. The dollar has started to strengthen ahead of the U.S. labor report. Expectations are for additional job losses which could reignite a flight to safety, reversing USD/CAD’s recent losses.
•Current price action is testing the support lines of both a short and long-term channel, making it a formidable level. We will center our strategy on the recent descending pattern which has seen its lower bound hold following several tests.

Suggested Strategy
Long: Place an entry at 1.0370-3/3 high as we have seen consecutive failed tests, increasing upside potential.
Stop: Set the stop to 1.0270 today’s low, and a 100 pips.
Target: The first target is 20-Day SMA currently at 1.0504, followed by 1.0550-trendline resistance.

 

Trading Tip – Canadian dollar support was already strong following the better than expected GDP report and speculation that the BoC would look to raise rates in the second half of the year. Policy makers are committed to remain on hold until June but have seen their flexibility diminish as inflation has begun to rise. A dismal building permit report combined with a weak Ivey PMI have taken some of the shine off of the Canadian economy, which could set up the “loonie” for  a retracement. Equity markets have trended higher as the fears over the Greek credit issues have subsided which has added weight to the USD/CAD. A dismal U.S. labor report could fuel concerns that the world’s largest economy is headed for a jobless recovery, and spark a flight to safety. The dollar continues to hold a positive correlation with risk aversion and could benefit from an increase in pessimism. The labor repot alone may not generate the needed momentum to reward our strategy, so it may be prudent to wait for initial volatility to subside before entering any positions.

Event Risk for U.S. and Canada

U.S. – Tomorrow’s Non-farm payroll report will be the major event risk for the week and the expected job loss of 60k could add excitement to already volatile markets. The U.S. economy was expected to have begun generating jobs at this junction in the recovery, especially considering the 5.9% increase in 4Q GDP. U.S. crude oil inventories aren’t the most market moving release but take on an extra significance for this pair due to oil’s correlation with the Canadian dollar. Demand from abroad has been a main source of growth which adds to weight to the upcoming trade balance. Advance retail sales for February will also garner significant focus as weak domestic demand is viewed as the biggest impediment to future growth.

Canada– Following the GDP report and rate decision the upcoming fundamental releases may lose some significance. Housing starts will generate some interest following an unexpected 4.9% decline in building permits. The 0.4 billion increase in International Merchandise trade could generate “loonie” support, especially following the disappointing Ivey PMI reading. Sustainable demand from abroad despite U.S. weakness will boost confidence that the recovery is sustainable. The Canadian labor report is forecasted to show the economy added another 17,500 jobs, following last month’s gain of 43,000. Signs of sustainable job growth will raise the outlook for domestic consumption and price growth. Rising inflation expectations will raise the outlook for interest rates which could spark bullish Canadian dollar sentiment.

0304rt2

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