Through the first quarter of the year, AUDCAD offered a rare interest rate arbitrage opportunity in today’s volatile market place. With the BOC following the Fed in cutting borrowing costs and the RBA firmly on hold at 7.25%, long positions were able to benefit from an increasingly favorable interest rate differential. Conditions have soured however, as traders begin to entertain the hope that the US has seen the worst of the current housing crisis.
The US is Canada’s chief trading partner, and a rebound in growth would spell an improvement in prospects for Canadian firms. Tellingly, Canada’s benchmark stock index rose to a monthly high led by improved profits posted by commodity export firms. The yield on the two-year Canadian government bond reached a two-month high as the market re-evaluates the extent of BOC monetary easing. The loonie has translated these developments into significant gains this morning, and looks poised to continue further should US data confirm a bottom is in place.
As of yesterday, the AUDCAD has been trading along a bullish trend line established on 12/27/2007. This morning, the pair broke through this trend line and settled above support at 0.9186, the 38.2% Fibonacci retracement of the 01/30 – 03/25 ascent.
[B]Hedging Strategy[/B]
[B]Currency Pair:[/B] AUDCAD
[B]Long Term Bias:[/B] Bearish
[B]Long Term Position:[/B] Holding Short (from 04/03 trend line break)
[B]Short Term Bias:[/B] Bullish
[B]Short Term Position:[/B] Long above 0.9186, Target 0.9320, Stop-Loss at 0.9080
Traders looking to enter the trend reversal at a favorable price may consider a hedge long AUDCAD above 0.9186 with a target near the trend line support-turned-resistance at 0.9320. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should AUDCAD break out to the downside prior to the limit being hit. We will set the stop-loss near 0.9080 below recent range lows.
[B]Note:[/B] A trend change in AUDCAD is closely contingent on current US sentiment. Should we see erosion in the market’s confidence of a bottom in place for US economic outlook, AUDCAD may hold more upside potential. With that in mind, we will keep a close eye on AUDCAD price action on a return to the trend line in the context of upcoming US data releases.
[B]When should I use the hedging feature?[/B]
Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.
The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.
For more information on FXCM hedging strategies please visit What Is A Hedge Ratio? - FXCM UK.
[I]To reach Ilya with comments regarding this or other articles he has authored, please email him at <[email protected]>. [/I]