Volatility has been exceedingly high over the past three active trade days. This level of volatility would suggest the market is struggling to revive its efforts at generating a meaningful trend. And, among the most elemental of those trends that could overwhelm the market is risk appetite. It is difficult to escape the pull of such an inclusive fundamental trend; but there are a few pairs that can hold their own through the unpredictable swells.
| How stable is the USDCAD Range? • Levels to Watch: -Range Top: 1.0925 (Trend, Range, Fibs) -Range Bottom: 1.0635 (Fib, Range) • A revival or reversal of risk appetite is a constant threat for the entire currency market. However, there are a few pairs that can whether the more reserved trends behind this volatile economic driver. USDCAD is one of those pairs. The US and Canadian economies are closely linked to each other by means of trade; but more than that, both are generally in the same boat for growth and rates. There is some notable Canadian event risk ahead. • There is blatant congestion across the majors; but clear ranges are difficult to come across. For USDCAD, a descending wedge formation offers a general zone of price action. However, support cuts a wide path. A short-term trendline offers a floor around 1.0675. However, there is also a double bottom at 1.0635 and major Fib at 1.0590. Suggested Strategy • Long: An entry at 1.0685 is very close to the short-term trend, but deep in the overall range. • Stop: A stop of 1.0615 covers immediate support and the double bottom; but not the spike low. To secure profit, move the stop on the second lot to breakeven when the first target hits. • Target: The first objective is one-and-a-half times risk (105) at 1.0790. The second is 1.0860. |
Trading Tip – Volatility has been exceedingly high over the past three active trade days. This level of activity would suggest the market is struggling to revive its efforts at generating a meaningful trend. And, among the most elemental of those trends that could overwhelm the market is risk appetite. It is difficult to escape the pull of such an inclusive fundamental trend; but there are a few pairs that can hold their own through the unpredictable swells. USDCAD finds stability in the close economic ties between the US and Canadian economy. There is debate as to the reliance these two trade partners have on each other; but data confirms that they are in similar straits when it comes to growth and interest rates (if not financial health). This pair is known for its unusual and choppy nature; and there is no doubt that trends are short-lived when born. However, this is not to mean this pair doesn’t take a fundamental bias. Should the dollar rally or plunge under the auspices of its ties to risk appetite, concerns over its use in the currency market (as a safe haven or even reserve currency) can drive the most liquid currency against all its counterparts. These concerns should be taken into account when considering a range setup; because there are few economic indicators that promise significant market impact from the US side. Canadian data on the other hand is notable for its long-term impact. As for our strategy, we have taken the incredible volatility for the past week into account. Our entry is relatively aggressive and the first target well within reach; yet the initial stop does not cover the spike low from last month. We will cancel all open orders by Wednesday.
Event Risk for the US and Canada
US – After a week of heavy event risk including the non-farm payrolls data, the US economic docket clears in the days ahead. This is not to mean there are no notable indicators on deck; but those that are noteworthy have little established influence when it comes to market impact. Nonetheless, we should account for the long-term impact of the various releases. The consumer will be well read with credit activity in August, the leading ICSC retail sales and weekly jobless claims. Since consumer spending is the most influential player in the US economy, this collection of releases will carry some weight when it comes to projection the true foundation of economic recovery. However, even with the economic docket taken into account, the concern for volatility is in risk appetite. An unforeseen but ultimately overwhelming fundamental driver, the balance between expected return and financial instability is a constant concern for the dollar since it is currently competing for the role of top funding currency with the Japanese yen.
Canada – The Canadian dollar has been relatively volatile these past few weeks thanks to a draft coming off the other members of the commodity bloc. However, the lack of yield severely stunts the appeal of the currency – even if there is investment interest in its natural resources. This means that vigilance must be kept on the general level of risk in the market but also the loonie’s correlation to such trends. As for the calendar; there are many notable economic indicators this week. The employment report, however, tops them all.
| Data for October 6 – October 13 |
| Data for October 6 – October 13 | ||
| Date (GMT) | US Economic Data |
| Date (GMT) | Canadian Economic Data |
| Oct 7 | Consumer Credit (AUG) |
| Oct 6 | Ivey PMI (SEP) |
| Oct 8 | Initial Jobless Claims (Oct 3) |
| Oct 8 | Housing Starts |
| Oct 8 | ICSC Chain Store Sales (SEP) |
| Oct 9 | Net Change in Employment (SEP) |
| Oct 9 | Trade Balance (AUG) |
| Oct 9 | BoC Senior Loan Officer Survey (3Q) |
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to jkicklighter@dailyfx.com
