Many of the risk-sensitive pairs in the Forex market are showing uncertainty in direction just as a defining breakout nears. At this point, sentiment can dramatically alter the market’s path; but the catalyst for such a decision is unknown. This is our primary concern in scanning for potential range trades and the reason for our interest in AUDCAD. Gauging a pair’s exposure to risk trends is difficult; but like EURGBP and USDJPY, AUDCAD matches two fundamentally similar currencies to help buffer sharp fluctuations through sentiment.
Why Would AUDCAD Hold a Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 0.8935 (Fib, Range High)[/B]
[B]-Range Bottom: 0.8785 (Trend, Fibs, SMA)[/B]
· The primary driver for the currency market is still risk appetite (though the sterling crosses have certainly found volatility in a downgrade in the forecast for the [UK’s debt outlook](http://www.dailyfx.com/story/bio1/Sterling_Mounts_Impressive_Recovery_New_1242919097679.html)). For AUDCAD, sentiment is still a prominent fundamental theme; but its influence on this pair is far reduced. Both economies are considered to be the strongest performers in their respective regions while each enjoys a sound financial system (a comparison the BoC made).
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· The boundaries to the AUDCAD’s range may have been extended recently; but they are hard to miss. More importantly for this pair, there has been a general bullish bias in place since October. Therefore, the rising trend from February, Fib confluence and 20-day SMA all at 0.8785 makes the bullish position the preferable one.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: Entry orders will be placed at 0.8810, which is below spot, but well above swing lows.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 0.8750 is relatively tight; but nonetheless clears the dense support. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (60) at 0.8870 and the second[/B][B] target will be 0.8930. [/B]
[B]Trading Tip[/B] – Many of the risk-sensitive pairs in the Forex market are showing uncertainty in direction just as a defining breakout nears. At this point, sentiment can dramatically alter the market’s path; but the catalyst for such a decision is unknown. This is our primary concern in scanning for potential range trades and the reason for our interest in AUDCAD. Gauging a pair’s exposure to risk trends is difficult; but like EURGBP and USDJPY, AUDCAD matches two fundamentally similar currencies to help buffer sharp fluctuations through sentiment. Both Australia and Canada are predicting an early recovery from their respective slumps and have relatively stable financial and credit markets. This is not just an arbitrary comparison either. Canadian officials drew just such an assessment recently when projecting their eventual recovery. This natural, fundamental cushion will help with volatility; but positioning is still essential for a successful trade. Our strategy looks only to the long-side of our given range to fall in line with the general trend over the past six months. The technical outline for this pair is very clear, which allows for an easily placed entry, exit and targets. Our stop is notionally small even though our entry isn’t necessarily aggressive. At the same time, our objectives are relatively small – an essential component as we want this position to play out quickly. Respecting the approach of the weekend, we will cancel all open orders by Friday afternoon or should spot hit 0.8775 or 0.8950 before we are executed.
Event Risk for Australia and Canada
Australia – With one of the world’s strongest economies and highest benchmark lending rates, it comes as little surprise that the Australian dollar is sensitive to risk trends. However, there are questions as to how the currency could respond to shifts in sentiment. Considering the Aussie economy has reported a relatively modest recession and has maintained a sound financial system, there is a safe haven aspect to the currency. At the same time, the high yield associated to the unit draws interest for those seeking risk. As for scheduled event risk on the docket, all the notable data is scheduled for release through the second half of next week. Leading composite indices, home sales, quarterly corporate investment numbers and private sector credit are notable readings for the economy; but not historically market moving.
Canada – Canada is considered one of the best performing economies in the western hemisphere - a region of stark contractions. We will see the focus on growth heightened by two specific pieces of event risk over the coming week. Due tomorrow, the retail sales report is a known market mover. As a measure for consumer health (the largest sector of the Canadian economy), it will act as a good indicator for general growth. The next piece of event risk doesn’t cross until next Thursday. The broadest measure of trade for Canada, the first quarter current account balance will take head of exports contributions to growth, consumption habits in Canada and the net capital flows that are supporting or detracting the economy.
[B]Data for May 22 – May 29[/B]
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[B]Data for May 22 – May 29[/B]
[B]Date (GMT)[/B]
[B]Australia Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Canada Economic Data[/B]
May 27
Westpac Leading Index (MAR)
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May 22
Retail Sales (MAR)
May 28
HIA New Home Sales (APR)
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May 29
Current Account (1Q)
May 28
Private Capital Expenditures (1Q)
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May 29
Private Sector Credit (APR)
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>.