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Bullish EUR/CAD: Breakout + Macro Forces Favor Upside

Bullish EUR/CAD: Breakout + Macro Forces Favor Upside

2016-09-13 19:00:00
Tyler Yell, CMT, Currency Strategist
Share:

Bias: Bullish EUR/CAD On First Close > 200-DMA (1.4770)

Point to Establish Long Exposure: Daily Close > 1.4770 or Pullback at 1.45/46 Zone

Spot: 1.14778

Target 1: 1.4824 May 9 High

Target 2: 1.5028 April 5 High With Possibility for Move Toward 1.5250+

Invalidation Level: Close Below 78.6% of September Range at 1.4472

Recommended Reading: USD/CAD Technical Analysis: Risk-Aversion Drops Loonie

Bullish EUR/CAD: Breakout + Macro Forces Favor Upside

Something is amiss with the Canadian Economy. The economic data out of Canada has consistently been surprising to the downside and the central bank, the Bank of Canada, is now tilting inflation forecasts lower.

At a speech in New York on Tuesday, Bloomberg Intelligence Economist Richard Yamarone noted that Canada might be heading for a recession. Yamarone elaborated on the view by stating that the Canadian government expected trade and manufacturing to be the “wild cards” that helped the economy avoid a disaster from the crash in energy prices.

The weakness in Emerging Markets and the Commodity Bloc was enough to send USD/CAD to one-month highs on Tuesday. However, a bit more significant was the intraday move above the 200-DMA in EUR/CAD. A daily close above the 200-DMA has not occurred in EUR/CAD since April, but a few components are leading to EUR strength that is worth noting as well.

On September 8, the European Central Bank provided no new hope for EUR bears who were expected the ECB to expand QE bond-buying rules or present speculation of further rate cuts. The EUR has failed to weaken thanks in large part to a strong current account reading that shows a building surplus. The positive account surplus shows that from a trade and investment flow component that more money is coming onshore of the Eurozone than is leaving the Eurozone. Naturally, with stable central bank plans and more money coming into the country than leaving, it is difficult to imagine significant EUR weakness without any of these components changing.

Trade Setup:

The Chart above (D1 EUR/CAD), shows a picture of sideways consolidation that has persisted since late-August 2015. While there was a very aggressive move higher from December to January, this can be interpreted as a sucker’s rally or ‘b’ wave in Elliott Wave parlance that is part of a sideways correction.

In such a technical environment, the million dollar question is when the sideway consolidation will end? Naturally, there is no definitive answer ahead of time, but we can look for clues as to a valid breakout. The first key clue will be a break above 1.4770, the 200-DMA. For those that are confident in further CAD weakness or EUR strength, there may be a better average price entry opportunity on a pullback toward 1.45/46, but we will still be lacking evidence of a developing breakout higher.

Either a breakout or a pullback would present an opportunity given the fundamental setting. Given this environment, a trailing stop would be used above an opposing down-fractal or the 3-day low, whichever is lower on the daily chart. Such a trade would align with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

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