USD/CAD The Pair to Short-Term Range Trade

A significant amount of event risk is ahead and it would be prudent to wait until after tomorrow�s releases before executing a trade. However, the expected improvements in the labor market could lead to a bout of risk appetite and generate the bearish USD/CAD price action that we are expecting.

[B]How stable is a [/B][B]USDCAD[/B][B] Range[/B][B]?[/B]

         [B][/B]

         ·         [B][U]Levels to Watch:[/U][/B]

         [B]-Range Top:       1.1100 (Range, SMA, Fib)[/B]

         [B]-Range Bottom:  1.0700 (Pivot, Range)[/B]

         

         ·         With the interest rate differential minimal between the U.S. and Canada, risk sentiment has been the primary driver of price action. As summer trading has come to an end we have seen equity markets remain range bound which has beget similar price action for the pair. However, we could see an increase in volatility following the upcoming Labor Day holiday which officially signals and end to the season. 

         [B][/B]

         ·         Oil prices also have considerably influence over the currency pair and any directional moves in crude could translate into a break from current consolidation. Additionally, there is considerable event risk ahead with U.S. and Canadian employment reports followed by a BoC rate decision.

         

         [B][I]Suggested Strategy[/I][/B]

         [B][/B]

         ·         [B][U]Short[/U][/B][B]: Setting entry orders at 1.1000 would confirm bearish momentum.  [/B]

         ·         [B][U]Stop[/U][/B][B]: A stop of 1.1125 should cover potential baseless spikes due to holiday volume. 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 1.0897-9/1 low with potential to 1.0700.  [/B]

                                                                             [B]Trading Tip[/B] – A significant amount of event risk is ahead and it would be prudent to wait until after tomorrow’s releases before executing a trade. However, the expected improvements in the labor market could lead to a bout of risk appetite and generate the bearish USD/CAD price action that we are expecting. Traders must also be aware that holiday volume will leave the pair susceptible to unfounded spikes and false breakouts. Regardless, solid resistance levels above the pair should help contain price action to its current range. We are seeing the 50-Day SMA at 1.1089 converging with the 38.2% Fibo extension of 1.1723-1.0634 at 1.1042.  Nevertheless, the USD/CAD has recently been prone to sharp moves and a break above these levels could be the beginning of a longer-term move. Yet, we did see the pair trade in a 500 pip range for a five month stretch in 2008 which could be repeated with the prevailing uncertainty.

[B]Event Risk for the US and Canada[/B]

[B]US [/B]– Markets are looking for direction and wasn’t able to find any from the recent FOMC minutes where they left their growth forecast relatively unchanged from June’s prognostications. Improving fundamentals are clearly showing that the current recession has ended or nearing its conclusion but questions remain over the scope of a recovery. Concerns are that we will see elevating unemployment suppress consumer consumption which could set the stage for a drop off in growth once government stimulus evaporates. Therefore, tomorrow’s US Non-Farm payroll report could not only dictate the longer term outlook for the dollar but shift the current paradigm. It is widely expected that the greenback will begin to trade on fundamentals once there is certainty regarding the recovery as oppose to its current correlation to risk sentiment. However, early forecasts are calling for a mild improvement in the level of job losses to -230K from -247K which could illicit a tepid response and leave dollar crosses range bound.

[B]Canada [/B]– Employment figures from Canada will simultaneously cross the wires with the U.S. figures and is expected to show a similar slowing of job losses. Economists are forecasting that the economy gave back another 20,000 jobs following a decline of 44,500 in July. The U.S. report will have the greater influence on the pair as it has a greater impact on risk sentiment. However, a significant improvement or disappointment could impact “loonie” flows. Therefore, traders may need to weigh the results against each other if they tell different stories. Manufacturing and housing data will also provide insights into the state of the Canadian economy and could impact intra-day price action. The main event risk could come from the Bank of Canada rate decision where policy makers are expected to leave their benchmark rate at 0.25%. A continuation of recent rhetoric from Governor Carney that the Canadian dollar’s strength could hinder the country’s recovery could spark bearish “loonie” sentiment. The head of the central bank signaled that steps could be taken to dampen the currency’s movement.

                                               [B]Data for September 4 – September 11[/B]

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                                   [B]Data for September 4 – September 11[/B]

                                                     [B]Date (GMT)[/B]

                                   [B]US Economic Data[/B]

                                   [B][/B]

                                   [B]Date (GMT)[/B]

                                   [B]Swiss Economic Data[/B]

                                                     Sep 4

                                   Change in Non-Farm Payrolls (AUG)

                                   [B][/B]

                                   Sep 4

                                   Net Change in Non-Farm Payrolls

                                                     Sep 9

                                   Fed’s Beige Book

                                   [B][/B]

                                   Sep 4

                                   Ivey PMI

                                                     Sep 10

                                   Trade Balance (JUL)

                                   [B][/B]

                                   Sep 8

                                   Housing Starts

                                                     Sep 11

                                   Univ. of Mich.   Confidence (SEP P)

                                   [B][/B]

                                   Sep 10

                                   BoC Rate Decision

To discuss this report contact John Rivera, Currency Analyst: <[email protected]>