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AUD/CAD Ascending Channel Provides Swing Trading Opportunity

AUD/CAD Ascending Channel Provides Swing Trading Opportunity

2011-05-31 21:15:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The Aussie-Loonie pair has been one of the less-volatile currency pairs in 2011, trading in a narrow 800-pip range for the first 5-months of the year. However, the swings have been quick and violent, given the nature of both currencies: they are both viewed as “commodity currencies,” noted for their correlations to energy and precious metals, and thus the view that they are the ‘riskier’ currencies, compared to the Japanese Yen, Swiss Franc, or U.S. Dollar. However, the Australian Dollar has been particular strong this year, and considering its parabolic climb from its yearly low on March 17, traders could be looking to take some profits off the table soon; now appears to be the perfect time ahead of a growth report due tomorrow that is expected to show slower growth for the antipodean nation. Similarly, after yesterday’s strong growth report out of Canada, coupled with a rate decision today that called for stimulus to be “withdrawn” shortly, it appears that the AUD/CAD pair, near the top of its ascending channel that has been carved out since mid-November, provides an ideal swing trading opportunity for traders looking to collect profits on a short call.

Levels to Watch:

-Range Top: 1.0520 (Trend)

-Range Bottom: 0.9760 (Trend)

audcad_ascending_channel_provides_swing_trading_opportunity_body_Picture_1.png, AUD/CAD Ascending Channel Provides Swing Trading Opportunity

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

  • Short: Place an entry at 1.0246 (Last Week’s Low)
  • Stop: Set the stop to 1.0499 (153-pip risk, Range Top, 2011 High)
  • Target: The first target is 1.0050 (100-SMA, move up stop to 1.0207), second target is 0.9758 (50-SMA)
  • Timeframe:5 to 10 days

Trading Tip The AUD/CAD pair failed on another test of its long-term descending channel, setting it up for a prime opportunity to short the pair amid heavy fundamental risk out of Australia and interest rate expectations moving in favor of the Loonie. The pair is currently pressed up against its 20-SMA at 1.0325, and consecutive closes below on the 6-hour chart would expose further space below in the ascending channel. The pair’s RSI has begun to fall after nearing overbought levels, and is now at 53 on the daily chart. Similarly, the MACD Histogram has just diverged negative, a bearish signal, suggesting, at least on a technical basis, that the pair’s momentum is headed for an exchange rate in favor of the Loonie. To this end, the Slow Stochastic oscillator has halted its trend higher, and while the %K is still greater than the %D, at 74 and 70, respectively, the indicator is heading south once more. The technical picture fits neatly with the fundamental picture over the next few days for further AUD/CAD pair weakness.

Event Risk for Australia and Canada

Only Australia has data due the remainder of the week, and all of it comes before Thursday. However, with the gross domestic product figure due tomorrow during the Asian session, Aussie-based pairs will likely see a spike in volatility, despite the limited effect that GDP could have on the market given the fact that the components of the headline figure are well-documented before the release of the aggregate figure.

Australia – Although an index of manufacturing data for the antipodean nation is due in the overnight, the key event for the week remains the headline growth figure for Australia. Growth is forecasted to have slowed down in the first quarter of 2011, with the median expectation according to a Bloomberg News survey showing a 1.1 percent contraction after growing by 0.7 percent in the fourth quarter of 2010, on a quarter-over-quarter basis. On a yearly basis, growth is expected to have slowed to a 1.0 percent pace. A stronger Aussie has insulated the economy from rising price pressures, but the housing market has struggled, and today, the Reserve Bank of Australia’s Ric Battellino forecasted “subdued” growth in consumer credit. A disappointing figure, showing subdued or negative growth, could hurt Aussie-based pairs.

Canada – No data is due out of Canada for the remainder of the week, but the data released earlier this week certainly favors further Loonie strength. Following the release of the first quarter growth figure on Monday, coupled with the Bank of Canada rate decision today and ensuing commentary by Governor Mark Carney, the currency appears to be ready to resume its appreciation across the board.

Data for May 29 to June 3

Data for May 29 to June 3

Date

Australia Economic Data

Date

Canada Economic Data

May 31

AiG Performance of Manufacturing Index (MAY)

June 1

Gross Domestic Product (QoQ) (1Q)

June 1

Gross Domestic Product (YoY) (1Q)

Written by Christopher Vecchio, Currency Analyst

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

Follow Christopher Vecchio on Twitter: @CVecchioFX

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

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