We are in the midst of a dollar correction and a lesser risk appetite reversal. How meaningful this turn in the tide will be is not yet clear; but it is worth noting that the fundamental strength of risk appetite has been weeks for weeks if not months.
[B]How stable is the EURCAD Range?[/B]
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.5900 (Fibs, Trend, Double Top)[/B]
[B]-Range Bottom: 1.5340 (Trend, Pivot, Fibs)[/B]
· High volatility from EURCAD shows a significant correlation to currents of risk appetite through the system. However, while the reaction from the currency pair is marked when the shift in sentiment is significant; it is clear that when the change is moderate, the correlation in the trend begins to break down. This makes sense as the euro and Canadian dollar see the same balance of risk and reward. Event risk could very well spark a breakout.
[B][/B]
· It is difficult to define the price action from EURCAD over the past few months as a range – it is more properly termed congestion or chop. However, this ill-defined volatility does has its technical boundaries; and we are coming up now on resistance. A falling trend (12/16 to 3/20 to 7/9) has met Fib confluence at 1.5900.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Short[/U][/B][B]: We are already pulling back from resistance, and 1.5870 is still aggressive.[/B]
· [B][U]Stop[/U][/B][B]: Volatility and the general, bullish bias require a wide stop. Even 1.5970 is tight. 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 [/B][B]is one and a half times initial risk (150) at 1.5720. The second is 1.5570. [/B]
[B]Trading Tip[/B] – [B]We are in the midst of a dollar correction and a lesser risk appetite reversal. How meaningful this turn in the tide will be is not yet clear; but it is worth noting that the fundamental strength of risk appetite has been weeks for weeks if not months. Regardless of direction, [/B][B]this underlying current will define the path that most of the currency market’s pairs take.[/B][B] EURCAD is no exception. However, this commodity cross does not have a straightforward response to risk appetite or aversion. Fundamentally, both the Euro Zone and Canada are looking to pull out of their recessions (neither is quite there yet), each has a slow pace of recovery ahead of them and their respective interest rate forecasts are measured. Despite all of this though, when there is an aggressive change in risk appetite; EURCAD responds with the euro as the safe haven and stable growth prospect while the Canadian currency reacts as a high-yield prospect (though neither can really stake a claim these attributes). Therefore, the concern here is severity of underlying risk trends. As long as we have a slow, measured reversal or controlled revival of optimism; this pair is likely to respond to its major technical boundaries. Immediate resistance is seen in a confluence of Fibonacci levels, double top and long-term trend at 1.59. This looks like a solid level; but naturally high volatility could create a false breakout scenario (especially with a number of high-level economic releases on deck). I will cancel all open orders by Wednesday morning and keep an eye on risk trends.[/B]
[B]Event Risk for the Euro Zone and Canada[/B]
eeEEEEEEeGGHGJJJJJ[B]Euro Zone [B]–[/B] [/B]The euro is still the foil to many of its counterparts. Taking stock of its fundamental position, the currency currently has a significant yield premium over some its more liquid peers but the outlook for policy has been limited by the threat of an uneven economic recovery. While German and France has seen positive growth through the second quarter, many European Community members (including Spain and Italy) are still suffering from severe contractions. At the very least, the struggle of some economies will limit the strength of others through trade and regional policy efforts. In the meantime, scheduled event risk can feed short-term speculation of a recovery and therefore volatility in the currency. The PMI data is acknowledged to data akin to a leading GDP measure. Other notables include the German CPI, IFO business sentiment survey and GfK consumer confidence.
[B]Canada [/B]– Like the euro, the Canadian dollar does not have a clearly defined link to risk appetite. Canada’s economy is still considered in a better position than its American counterpart; but the recession up north has proven to be stickier than in the US. What’s more, interest rates from both are expected to be held at their respective lows until well into 2010. Therefore, the Loonie dollar is in an unusual situation where its correlation to bigger economic trends is defined by its traditional groupings (the US’s largest trade partner, a commodity bloc member, etc). In the short-term, the docket offers only one notable release to be concerned with. The retail sales report has proven itself a market mover in the past; and the focus on consumer health may retain this relationship.
[I]Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>. [/I]