When considering range trades early this week, it is vital to account for both exposure and liquidity. Over the past week, long-term congestion has exposed many technical ranges; but the bias behind sentiment has led these pairs to the same side of their trading zones: the extreme before a significant breakout in favor of risk appetite.
How Stable is a USDCAD Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.1100 (Range, Fibs, SMA)[/B]
[B]-Range Bottom: 1.0740 (Pivot)[/B]
· The unusual market conditions effecting price action for the majors and risk appetite are fundamental concerns first and foremost. While USDCAD doesn’t have the same reaction to changes in market-wide sentiment that a pair like AUDUSD has, the US dollar frequently intensifies the correlation on its own. With liquidity filling out as the week wears on, we could see scheduled event risk spark price action - though only [the BoC decision is noteworthy](http://www.dailyfx.com/story/bio1/US_Dollar_May_Finally_See_1252083468904.html).
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· While we have come up on a notable range of support for USDCAD, [short-term momentum is concerning](http://www.dailyfx.com/story/bio2/~Weekly_Classical_Outlook__A_Technical1252062816372.html). The 350-plus pip decline over just three sessions could very well carry a significant breakout or at the very least pull spot down to the test August’s lows. Support questionable in its authority as a pivot that has roots back to July of 2007.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: An entry at 1.0760 is just above the relative pivot level but well within reach of spot. [/B]
· [B][U]Stop[/U][/B][B]: Setting a stop at 1.0690 does not allow for a volatile, false break or move on August lows. 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 set wider than initial risk at 1.0860. The second target is 1.0970. [/B]
[B]Trading Tip[/B] – When considering range trades early this week, it is vital to account for both exposure and liquidity. Over the past week, long-term congestion has exposed many technical ranges; but the bias behind sentiment has led these pairs to the same side of their trading zones: the extreme before a significant breakout in favor of risk appetite. As such, there is the potential to load up on the same position (long dollars or short risk for example) without realizing it. Volatility is an equally, tricky issue. The momentum that USDCAD has developed over the past few active sessions was contributed to in no small part by markets thinned by the US holiday. With our suggested strategy, we are dealing with both of these issues. Like many of our positions from last week, this setup looks for a long-dollar (short risk) approach. What’s more, we are further fighting a strong, short-term trend with a weakened bull interest to hold the plunge back. All told, this is a setup only for those that have not leveraged themselves in the greenback and are risk tolerant. Initially, this could very well develop through technical channels as a retracement that moderates the artificial levels of activity of the past few days. Since this is a move based on moderation, I will cancel all lingering orders by Tomorrow.
Event Risk for the US and Canada
US – Economic data on the US docketover the coming week will be invaluable for long-term forecasts but lacking for short-term volatility. The Fed Beige Book offers all the data that the central bank will take into account when it votes on interest rates at its next gathering. What’s more, forecasts for financial health, economic recovery and inflation will all be sourced from this public report. As for regular indicators, the consumer credit indicator for July will offer a more complete measure of lending health than bank default reports or government updates. The University of Michigan sentiment gauge may be the most promising indicator in terms of volatility; but modest surprises have offered little in the way of price action as the general pace of slow, economic recovery is set. In the end, risk appetite will decide the fate of the dollar. Without data to interfere, the pressure in investor sentiment finds a perfect lightening rod.
Canada – While the market’s ranks slowly fill out from the past few months’ summer lull, the Canadian docket will provide a range of notable pieces of event risk to charge volatility. Top billing will go to Thursday’s Bank of Canada rate decision. At only 0.25 percent there is little to no chance of further easing through the benchmark lending rate. At the same time, a deeper than expected recession and lingering credit troubles will prevent policy makers from turning the corner on their policy approach. Comments that accompany the ultimate decision will be the most market moving facet of this event. Forecasts for growth and inflation, timing surrounding the next rate decision and any mention of unorthodox policy could alter the loonie’s course. Other economic indicators of note – but ones that won’t incite nearly as much volatility – will be housing starts, building permits and the physical trade balance.
[B]Data for September 8 – September 15[/B]
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[B]Data for September 8 – September 15[/B]
[B]Date (GMT)[/B]
[B]US Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Canada Economic Data[/B]
Sep 8
Consumer Credit (JUL)
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Sep 8
Building Permits (JUL)
Sep 9
Fed’s Beige Book
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Sep 9
Housing Starts (AUG)
Sep 11
U.of Michigan Confidence (SEP P)
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Sep 10
International Merchandise Trade (JUL)
Sep 15
Advanced Retail Sales (AUG)
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Sep 10
Bank of Canada Rate Decision
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>.