Enthusiasm behind the general trend in risk appetite is still well off the levels that developed the aggressive trends of just a few months ago; but the general bias and short-term volatility is still high.
[B]How stable is the AUDCAD Range?[/B]
• [B] [U]Levels to Watch:[/U]
-Range Top: 0.9575 (Pivot, Channel Top)
-Range Bottom: 0.9340 (Fibs, Channel, Pivot)[/B]
• It would seem from the relative price action of the Australian and Canadian dollars against their various crosses that the commodity link is a dominant fundamental driver. However, a large export of natural resources does not balance growth, interest rates and financial stability. And, when it comes down to it, the fundamental outlook for the Aussie economy is far better than that of its Canadian counterpart.
• First and foremost, there is a tangible bullish bias in AUDCAD price action for the past year. However, it is the past two-and-a-half months that has produced a definable trend. After a sharp two-day sell off, this pair has tested the bottom of its channel, which happens to coincide with a confluence of Fibs and a pivot around 0.9335/50.
[B]Suggested Strategy[/B]
[B]• [U]Long[/U]: Given the limited scope of the range, an aggressive entry of 0.9365 is necessary.
• [U]Stop[/U]: A stop of 0.9305 is sufficient to cover channel support, but still reasonable for risk. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• [U]Target[/U]: The first objective is 1.5 times risk (90) at 0.9455. The second is 0.9515. [/B]
[B]Trading Tip[/B] – This makes for poor range trading conditions. However, there are still opportunities in the currency market; but they come with additional risk. Doing what we can to anchor the risk in a congestion setup, we have spotted a rising trend channel in AUDCAD. The general bias in price action allows for trend development which dissipates the influence of volatility and subsequently helps to maintain definable boundaries on price action. The channel that we have highlighted is not highly consistent; but following its pitch, we find the additional support in a Fib confluence and pivot around 0.93050 to be a reasonable area for the trend to take up once again. Considering the instances of volatility and corrections we have seen over the past few months, there are two primary concerns for the stability of our channel: notable economic releases and risk appetite. The docket is relatively light of major market movers until next week’s Bank of Canada rate decision. However, sentiment is difficult to benchmark ahead of time. We will cancel all open orders by Tomorrow as this setup should play out relatively quickly.
Event Risk for Australia and Canada
Australia – In just a week’s time, the Australian dollar has seen its fundamental health turn from bullish to very bullish. Adding weight to the general outlook for the Aussie economy to return to growth after staving off a recession through the second quarter, employment data unexpectedly reported a downtick in the unemployment level from six year highs with a 41,000 net addition to national payrolls. This certainly encourages hawkish expectations; but the real drive behind interest rate forecasts was the RBA’s surprise rate hike. The first of the G-20 economies to actually hike its benchmark rate, the policy group has not only set itself up to be the high yielding currency amongst its peers; but it has further bolstered expectations for higher income expectations on carry positions (thereby encouraging the strategy as a whole). As for fundamental drivers this week, sentiment indicators will add to growth forecasts while consumer inflation expectations will help define the central bank’s pace. However, none of the data is highly market moving.
Canada – The Canadian dollar is playing two roles. On the one hand, this is an economy that is lagging in its recovery of interest rates and economic growth; but it is also an economy that is a heavy commodity exporter (which has put the currency in considerable demand with the Asian recovery). This is a dichotomy of fundamental rolesthat will no doubt be rectified with risk appetite. Should sentiment continue to rise, the demand for natural resources will maintain its ascent. Alternatively, a collapse in optimism will cull demand for production trends that seem to be running ahead of actualized growth. As for economic data on the Canadian docket, the impact of the near-term listed releases is limited. However, next week’s BoC rate decision and the consumer-inflation data that precedes it will be good for developing a time frame for the eventual return of hawkish policy.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
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