Shorting Opportunity in EUR/CAD

07/08/2010 12:01 am EST

Focus: FOREX

The euro has traded higher as fears have subsided that the sovereign debt crisis could spread throughout the region and beyond. Bullish sentiment has started to wane as the single currency approaches fair value levels and traders head to the sidelines given the level of uncertainty surrounding the results of the stress tests on European banks.

Meanwhile, the Canadian economy, which has shown enormous promise as it emerged from the credit crisis relatively unscathed, has started to show signs of weakening. Indeed, the Ivey PMI manufacturing reading unexpectedly fell to 58.9 from 62.7, led by the employment component, which could be a sign that managers fear a slowdown in demand.

Nevertheless, when comparing the Canadian economy to its European counterpart, its prospects appear brighter, especially with emerging market demand holding firm, which supports a reversal and the continuation of the developing range. Meanwhile, the 100-day SMA at 1.3361 has provided resistance for the EUR/CAD and could be a formidable barrier given that the pair had traded below the technical level since December 4, 2009. A May bullish rally was turned lower at 1.3477, which adds to the case for a reversal.

Levels to Watch:

  • Range top: 1.3500 (range, SMA)
  • Range bottom: 1.2500 (range, pivot)


Click to Enlarge

Suggested Strategy:
     • Short: Place an entry at 1.3100 to confirm reversal
     • Stop: Set the stop to 1.3360 (50-day SMA)
     • Target: The first target is 1.2700 (6/29/10)

The Canadian dollar shrugged off the disappointing manufacturing data and is trading higher on broader optimism. Therefore, we must take into account global sentiment and its impact on oil prices, which holds a high correlation with the Canadian dollar. Given the resistance that the 100-day SMA has provided, we will be looking for a continuation of current weakness, and will wait for further bearish sentiment to confirm a reversal. However, we can’t discount the potential for another test of the upper bound at 1.3500 before an ultimate reversal.

By John Rivera of DailyFX.com

DailyFX provides forex news on the economic reports and political events that influence the currency market

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