Broader Technicals Look to Shore up USD/CAD Range

03/24/2009 10:23 am EST

Focus: FOREX

The dollar-based majors are still cooling from momentous volatility that was catalyzed over this past week. Many of these pairs have stalled ahead of significant technical levels, but none of these liquid pairs have the major technical backing that USD/CAD is currently enjoying.

Why Would USD/CAD Hold a Range?

Levels to Watch:
Range Top: 1.3000 (Major Range High)
Range Bottom: 1.2180 (Trend, Fib)

Through the near future, macro dollar themes will likely decide the direction of USD/CAD. Looking at scheduled event risk on both sides of this pair, only the US docket has anything resembling notable market-moving releases. However, while these are remarkable indicators that will offer cues on the health of the US economy, it all boils down either to a more severe recession or a passing break in the same plunge. Instead, talk about the dollar’s safe haven and reserve status will likely take over.

Despite the momentum behind USD/CAD’s plunge over the past week, the pair is bordered by a wide wedge formation. This long-term congestion pattern will take considerable conviction from the market to overcome. There is considerable selling pressure behind the dollar, but most of the majors are stalling.

Suggested Strategy

Long: Half-size (or smaller) entry orders will be placed at 1.2240—above current spot.

Stop: Our initial stop will be set at 1.2115, giving considerable buffer area beyond the trend. To secure profit, move the stop on the second lot to break even when the first target hits.

Target: The first objective equals risk (125) at 1.2365, and the second is aggressive at 1.2600.

Trading Tip – The dollar-based majors are still cooling from momentous volatility that was catalyzed over this past week. Many of these pairs have stalled ahead of significant technical levels, but none of these liquid pairs have the major technical backing that USD/CAD is currently enjoying. While momentum over the past few weeks has been solidly in the bears’ corner, this plunge nonetheless fits within a larger state of congestion. Though there has been some semblance of direction over the past months, the sometimes quick and sometimes gradual reversals have all taken place within the parameters of an ascending wedge. Our strategy is developed around this bigger technical pattern, and the initial double bottom that has been made above 1.2200 helps to provide some grounding from a pause in short-term momentum. However, follow through is still a very real concern with so many of the majors sitting on the edge of anti-dollar breakouts. Therefore, we are approaching this setup with a further reduced risk profile. First and foremost, the position size must be well below the normal layout for risk. Our stops and targets help to take advantage of any short-term volatility. Regardless, we will take off any open orders by Wednesday, as a position that does not play out by then could be building pressure behind a breakout.

Event Risk for US and Canada

US: Data scheduled for release from the US docket is historically noteworthy, but its potential in current market conditions is far reduced. From the laundry list of indicators scheduled for release over the coming week, we will see indicators that will cover housing activity, consumer spending, factory activity, employment, and long-term growth. However, it is prudent to realistically project the kind of reaction each of these indicators could have on price action. The general consensus of the US economy is a deep recession that is still on pace to further slow to its worst pace in decades. It stands to reason that market participants have priced in much of the worst for the US economy such that ongoing declines will have little net impact on overall price action. Alternatively, a modest uptick in data will not easily revive sentiment as the global downturn has turned most traders into pessimists and skeptics. The real fundamental action will follow the discussion behind the dollar’s safe haven status and the potential for the world to change its long-held reserve currency.

Canada: There are no notable market moving economic indicators scheduled to cross the wires over the coming week. Instead, traders will have to gauge their impressions for the long-term health of the Canadian dollar through comparisons and contrasts to its US counterpart. Personal spending and durable goods orders data scheduled for release will be of particular interest considering American consumption accounts for more than three-quarters of Canadian exports. However, so far, this link has been a very lagging (if not sometimes completely absent) relationship for USD/CAD price action. Another unknown is commentary from Canadian finance minister Flaherty and Bank of Canada governor Carney leading into the G-20 summit next week. They have warned of significant market and economic problems later down the line for the economy. In fact, some of their commentary has gone beyond what data has projected.

By John Kicklighter, currency strategist, DailyFX.com

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