Despite the spread of risk aversion across the market, traders are still seeking sure yield with a low threat of volatility. The AUDCAD is the perfect match for these requirements. The Reserve Bank of Australia is one of the only central bank among the G10 that remains hawkish. In contrast, the Bank of Canada has just assumed a more aggressive approach to easing its own monetary policy with a 50 basis point rate cut this month.
This dichotomy in interest rate policy is rare in current market conditions. This fact alone has encouraged a substantive rally that has potential to turn into a dominant, long-term bull trend. What’s more, the presence of the Canadian dollar helps to act as a buffer to the potential of a major risk reversal. The loonie has a tendency to diverge from all of its major counterparts. This may prove useful for AUDCAD which may see its Aussie component hit by a potential sharp jump in risk aversion. However, our bullish trend has hit considerable resistance with a range high and a hedge is necessary.
[B]Hedging Strategy of the Week
Currency Pair: AUDCAD
Long Term Bias: Bullish
Long Term Position: Holding Long (from 12/28 swing low at 0.8535)
Short Term Bias: Bearish
Short Term Position: Short Against 0.9375 (range top), Target 0.9100 (rising trend)[/B]
The AUDCAD has provided a very consistent rising trend since the beginning of the year. However, recent price action has seen the pair hemmed in by a range that has left us to congestion. Considering the medium-term outlook for interest rates, we want to stay with the bullish trend and hedge any drawdowns that may result from the preponderance of the temporary range. Traders that are already in a profitable long position or are looking to enter at a good price should consider a hedge in a short AUDCAD trade with a stop above 0.9375/9400 and a limit near the rising trend seen below (around 0.9110 on 3/19). Should our hedge position reach its target, we will profit from a rebound to the upside; and if it is stopped out, our long-term position will benefit from the break and follow through momentum to the upside. The long-term position should have a stop as well, below 0.9050.
[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]Written by John Kicklighter and Ilya Spivak, Currency Analysts for DailyFX.com
To contact John about this or other articles he has authored, you can email him at <[email protected]>
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