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CAD/CHF Channel Presents Range Opportunity

CAD/CHF Channel Presents Range Opportunity

2010-05-25 23:49:00
John Rivera, Currency Analyst
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 RT-10-05-25-01

How stable is the CAD/CHF Range?

• The Canadian dollar has been dragged lower on broader growth concerns. Oil has been in a sharp decline on the dimming prospects of global consumption which has a high correlation with the “loonie.” However, the economy that will be the most impacted by a slowdown in the Euro-area will be Switzerland and that has the Franc under pressure as it has mirrored the Euro. Additionally, we could see the prospect of a BoC rate hike also lend support for the pair, keeping it within its current channel.

• The CAD/CHF is looking to test the lower bound of the current channel which is defined by connecting the 12/3 and 5/21 lows. The long-term trend line has withstood several tests adding validity to it as a barrier. Additionally, the 50-Day SMA at 1.0656 lies below and could limit downside risks as well.

Suggested Strategy
• Long: Place an entry at 1.0680-5/21 low
• Stop: Set the stop to 1.0600-below the 50-Day SMA
• Target: The first target is the 20-Day SMA at 1.0826 followed by 1.1000

Trading Tip – An established trend line and another formidable technical barrier in the 50-Day SMA justifies our set-up. Therefore, we will look for the recent spike low to be tested before taking a long position just below trend line support. Recently, the Franc has proved to be more resilient than the “loonie” as the troubles in Europe have sparked broader concerns. A return of optimism could then in turn provide a greater level of Canadian dollar support. We will look for a shift in the outlook for the global economy to give us confidence in our position, which has started to take root on the back of improving U.S. fundamentals. Growth in the world’s largest economy diminishes the potential impact of a slowdown in the Euro-Zone. We could also see the desired price action generated by a BoC rate hike at their upcoming rate decision.

Event Risk for Canada & Switzerland

Canada – The looming BoC rate decision may overshadow any prior fundamental releases with economists calling for a 0.25 rate hike. The first quarter GDP report could initiate “loonie” support if the growth figures confirm that the strength of eth economy. The house price index isn’t typically a market moving release, but it should be watched, as a surge in the house price index would be a catalyst for tightening from the central bank.  

Switzerland Swiss fundamental data typically offers very little event risk and that should be the case going forward despite the number of significant releases on tap. Employment, trade and growth figures will provide insight into the current state of the Swiss economy. However, those figures will hold little weight in the face of the issues in the Euro-Zone its primary destination for exports.

RT-10-05-25-02

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