Calm Markets Highlights the AUDCAD's Range; But Stability Won't Last Forever

Congestion has grown so prevalent that it has started to set in for even the most volatile and high-risk currency pairs. However, all ranges eventually come to an end (with those risk-laden pairs typically making the first move). For AUDCAD, the fundamental catalysts for a potential breakout are relatively reserved; but the technical build up is coming upon its critical state.

Why Would AUDCAD Hold a Range?




















· Levels to Watch:
-Range Top: 0.8930 (Fib, Range High)
-Range Bottom: 0.8760 (Trend, Fibs, SMA)

· Sentiment is still sidelined for even the most risk-sensitive currency pairs; but this does not mean we should leverage our risk to unforeseen fundamental event risk. Even though there is a considerable yield differential for AUDCAD (indeed all Aussie dollar crosses have such a gap), this pair nonetheless finds stability in the relative strength of the two economies; the stability in their respective financial systems; and a shared interest in commodities.

· This yet another chart pattern that promises short-term congestion but threatens breakout pressure further out on the horizon. AUDCAD has produced a rising wedge formation that has really taken shape since March. There is a clear, bullish bias; but resistance in a long-term Fib (Jul. to Oct. 2008) and prominent pivot can buy time for range activity.

Suggested Strategy

· Short: Entry orders will be placed at 0.8925 for an aggressive risk/reward profile.
· Stop: An initial stop of 0.8975 covers the pivot high but not the May 19 false breakout. To secure profit, move the stop on the second lot to breakeven when the first target hits.
· Target: The first objective equals risk (50) at 0.8875 and the second target will be 0.8800.

Trading Tip – Congestion has grown so prevalent that it has started to set in for even the most volatile and high-risk currency pairs. However, all ranges eventually come to an end (with those risk-laden pairs typically making the first move). For AUDCAD, the fundamental catalysts for a potential breakout are relatively reserved; but the technical build up is coming upon its critical state. For the past three months, this commodity bloc cross has developed an ascending wedge pattern with a clear top at 0.8930. Frequent test and rejections of this resistance have since solidified its prominence among the technically savvy; but it also calls greater attention to itself. Now with approximately 150-175 pips to work with; this wedge will soon have to decide on a direction. Though it is difficult to estimate when a breakout could occur, it is best to err on the side of caution. Therefore; our strategy will be held open until Friday’s London session close. Should our orders still stagnate until then, or spot hit 0.8840 before our entry, we will cancel them. Looking at the setup itself, there are a few particulars that should be noted. Entry is aggressive (set very close to resistance); but that is a necessity considering the timing and tension in the range. Furthermore, the stop does not cover the March false breakout, but this is accordance with a reasonable risk/reward setup. And, another push above resistance as aggressive as that is likely to evolve into a true trend revival.
Event Risk for Australia and Canada

Australia – The Australian dollar may be the best positioned economy among the G10. Should the recovery in risk appetite continue, the Aussie dollar will draw capital with the highest benchmark yield among its global counterparts. At the same time, should sentiment sour and investors seek safety in a stable economy and financial system; Australia has maintained growth and credit conditions are still robust thanks to relatively small exposure to the financial collapse in the Western world as well as relatively modest counterparty risk among local lenders. However, skeptical market participants are still waiting for any sign that the economy is not as healthy as the currency and data have suggested. Data over the coming week will help establish a benchmark for expectations. First quarter housing construction, employment and the RBA minutes will present a mishmash of market-moving fundamental data.

Canada – There has been a lot of activity on the Canadian dollar’s fundamental front; but much of this data (and its market-moving influence) has come and gone. Looking at the docket for the coming week, the offerings are relatively bare-bones. Before the weekend, only the capacity utilization rate figure for the first quarter is of note; and even this indicator is lagging and a derivative of labor. The offerings within scope after the lull in volatility are just as staid. Manufacturing shipments is a repetition of trade data; and inflation has lost much of its impact since interest rates have been so thoroughly reduced. The greater threat to activity over the coming week will come through speculation surrounding the health of the US economy – its largest trade partner.
source: http://www.dailyfx.com/