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USD/CAD Descending Channel Provides Swing Trading Opportunity

USD/CAD Descending Channel Provides Swing Trading Opportunity

2011-03-17 14:41:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The USD/CAD pair has continued hold below parity, despite events in recent weeks that would usually dictate a shift to risk-aversion; the Greenback is considered more of a safe haven than the Canadian Dollar. Continued unrest in the Middle East and North Africa, coupled with a repatriation of funds and thus an unwinding of carry trades, has sent traders fleeing from commodity currencies, such as the Loonie, over the past week. Nonetheless, the USD/CAD pair continues to hold in its descending channel. After failing to break through the psychologically significant 0.9700 level during the last week of February and the first week of March, the pair jumped above 0.9973, yet was still unable to break parity and close above its range top. Now, with the pair having failed to close above its range top, our range trade from last week remains in play, with the opportunity still existing for traders to swing within the descending channel and collect profits.

Levels to Watch:

-Range Top: 0.9900 (Trend)

-Range Bottom: 0.9630 (Trend)

USDCAD_Descending_Channel_Provides_Swing_Trading_Opportunity_body_Picture_1.png, USD/CAD Descending Channel Provides Swing Trading Opportunity

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

  • Short: Place an entry at 0.9883 (50-SMA)
  • Stop: Set the stop to 1.0003 (120-pip risk (100-SMA))
  • Target: The first target is 0.9664 (0.00 Fibo, move up stop to 0.9807 (20-SMA)), second target is 0.9550.
  • Timeframe:7 to 14 days

Trading Tip The descending channel has been firmly in place since mid-November, but the bearish trend began in August after the Federal Reserve announced it would inject liquidity into capital markets via quantitative easing. As noted on the 6-hour chart above, when the USD/CAD pair has touched the range bottom of its descending channel, it has rebounded; most recently, this occurred at the beginning of March when it touched the 0.9700 level. Now, after touching the range top and falling below our trade from last week, the swing trade is still in play. In fact, the technical patterns are now where we expected them to be. On the six-hour chart, the RSI is now coming off of overbought conditions, and the MACD Histogram has indeed peaked, with the bullish divergence tailing off rather quickly. The Slow Stochastic oscillator is also close to confirming our sell signal, with the %K and %D nearly equal, having trended lower recently. Keep in mind our SSI reading suggests losses are on the horizon for the USD/CAD pair.

Event Risk for the U.S. and Canada

After a heavy volume of data earlier in the week, fundamental risk thins out as no data is due tomorrow for the United States. Canada, however, still has some significant data due. The data due today helped boost recovery sentiment, sending more traders into long Loonie positions.

U.S. – High event risk marked the calendar earlier in the week for the U.S., and with nothing due tomorrow, traders will have their eyes on the nuclear situation in Japan as well as a potential response by the G-7 finance ministers to add liquidity to the market in order to counted the sharp appreciation of the Yen.

Canada – Inflation in Canada, which has remained surprisingly subdued given the quick rebound in the Canadian economy relative to that of other advanced economies, will be measured tomorrow with the release of the consumer price index. A strong Loonie over the past few months has curbed rate hike expectations by the Bank of Canada, and the Overnight Index Swaps shows a meager 7.6 percent chance of a 25-bps hike at their next meeting.

Data for March 13 to March 18

Data for March 13 to March 18

Date

U.S. Economic Data

Date

Canada Economic Data

Mar 18

Consumer Price Index (MoM) (FEB)

Mar 18

Consumer Price Index (YoY) (FEB)

Mar 18

Bank Canada CPI Core (YoY) (FEB)

Written by Christopher Vecchio, DailyFX Research.

To contact the author of this report, please send inquiries to: research@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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