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A Tradable Bounce in the Beaten-Down CAD

A Tradable Bounce in the Beaten-Down CAD

2014-01-22 20:15:00
Liam McMahon, Head Forex Trading Instructor
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Talking Points:

  • Fundamental Concerns from Bank of Canada (BoC)
  • Finding a Good Trading Counterpart for CAD
  • Attractive Technical Set-up in CAD/CHF

The Canadian dollar (CAD) has been the market’s favorite whipping boy for perhaps the past six months, and the Bank of Canada (BoC) did nothing to reverse that trend this morning, as it expressed concerns about lower inflation.

The BoC expects inflation to remain below target for “quite some time,” and said that downside risks to inflation have increased of late. The BoC also left the door open for more cuts, saying “the timing and direction of the net change to the policy rate will depend on how new information influences this balance of risks.”

Suffice it to say that things aren’t great in Canada, but this had been established already. Personally, I believe the market is getting a little ahead of itself given how much CAD has sold off.

When looking to buy a weak currency, it’s important to find another currency with some fundamental weakness to sell it against, and here enters the Swiss franc (CHF). I’ve been a fan of trying to sell CHF for a long time now, as the Swiss National Bank (SNB) would prefer a weaker franc, and has proven willing to take steps to get it.

USDCHF has broken higher over the past few weeks and looks poised to continue to the upside, which would ideally bring most other CHF crosses higher as well.

Furthermore, there is an attractive technical set-up in CADCHF that bears watching. The pair is nearing the 61.8% Fibonacci retracement level from the pre-intervention lows (back in 2011) to the highs above 0.98, and has been trading in a descending wedge on the daily chart for a while now.

Guest Commentary: Potential CAD/CHF Bounce from Channel Support

A_Tradable_Bounce_in_the_Beaten-Down_CAD_body_GuestCommentary_LiamMcMahon_January22A_1.png, A Tradable Bounce in the Beaten-Down CAD

The pair is approaching that wedge support and showing some significant RSI divergence on the daily chart, providing a nice confluence of supporting factors that make this trade attractive, despite its countertrend nature.

By Liam McMahon Currency Strategist, GlobalFxClub.com

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

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