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EUR/CAD Range Forecasts Short Opportunity

EUR/CAD Range Forecasts Short Opportunity

2010-07-07 17:54:00
John Rivera, Currency Analyst
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The Euro has traded higher as fears have subsided that the sovereign debt crisis could spread throughout the region and beyond. Bullish sentiment has started to wane as the single currency approaches fair value levels and traders head to the sidelines given the level of uncertainty surrounding the results of the stress tests on European banks. Meanwhile, the Canadian economy which has shown enormous promise as it emerged from the credit crisis relatively unscathed has started to show signs of weakening. Indeed, the Ivey PMI manufacturing reading unexpectedly fell to 58.9 from 62.7 led by the employment component, which could be a sign that mangers fear a slowdown in demand. Nevertheless, when comparing the Canadian economy to its European counterpart, its prospects appear brighter, especially with emerging market demand holding firm which supports a reversal and the continuation of the developing range. Meanwhile, the 100-Day SMA at 1.3361 has provided resistance for the EUR/CAD and could be a formidable barrier given that the pair had traded below the technical level since December 4th, 2009. A May bullish rally was turned lower at 1.3477 which adds to the case for a reversal.

Levels to Watch:
-Range Top: 1.3500 (Range, SMA)
-Range Bottom: 1.2500 (Range, Pivot)

RT-10-07-07-01R

Suggested Strategy

Short: Place an entry at 1.3100- to confirm reversal
Stop: Set the stop to 1.3360-50-Day SMA
Target: The first target is 1.2700-6/29/10

Trading Tip – The Canadian dollar shrugged off the disappointing manufacturing data and is trading higher on broader optimism. Therefore, we must take into account global sentiment and its impact on oil price which holds a high correlation with the Canadian dollar. Given the resistance that the 100-Day SMA has provided, we will be looking for a continuation of current weakness, and will wait for further bearish sentiment to confirm a reversal. However, we can’t discount the potential for another test of the upper bound at 1.3500 before an ultimate reversal.

Event Risk for Europe. and Canada

Europe – The ECB will decide on future monetary policy on July 8th with economists expecting that the central bank will keep rates at 1.00%. Markets will look for any deviation from President Trichet’s post release comments from the ongoing rhetoric that interest rates are appropriate as risks between inflation and growth remain balanced. The status quo will make this a non-event leaving the German Zew survey as the potentially most market moving release. Investor sentiment in Europe’s largest economy is a strong sign of future growth and with the level of uncertainty a disappointing reading could sink the Euro. Consumer prices also bare watching despite the lack of price growth, as signs of deflation could spark growth concerns.

Canada – The Canadian employment report will be the key domestic event risk as broader trends have been targeted by the BoC in their monetary policy decision making process. Nevertheless, continued strong job growth will raise the outlook for the domestic economy and enhance its attractiveness for investors. Forecasts are for the economy to have added another 20K jobs marking the sixth straight monthly gain. Export, manufacturing and inflation data from May also dot the calendar and given their lagging nature should have a minimal impact of direction.

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