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Looking at market conditions, it is still very dangerous to look for range trades. Certainly, the range seen in AUDCAD has a short shelf-life as the potential for a breakout builds.

Why Would AUDCAD Stay in a Range?   ·         Levels to Watch: -Range Top:       0.8500 (Fib, Trend, SMA) -Range Bottom: 0.8150 (Trend, SMA, Fib)   ·         Though volatility has cooled over the past 24 hours, the conditions for range trading have improved little. Trends are still in full control for much of the market, while congestion in some pairs is leaning increasingly to breakouts. This is the case with AUDCAD. Though the boundaries of the range are very clear, the dwindling room for price action and ongoing speculation on interest rates and growth trends threaten to drive a breakout.   ·         While market conditions may not be favorable, the levels for the AUDCAD’s range are clearly defined. Support is somewhat imprecise with a rising trend, a range low and 38.2% fib falling around 0.8150/90. Resistance is far more prevalent. The primary support for 0.85 is the 50% fib of the major bear leg, but a pivot and 50-day SMA certainly help.    Suggested Strategy   ·         Short: Entry orders of 0.8460 are aggressive but necessary given breakout potential.   ·         Stop: An initial stop on both lots at 0.8520 doesn’t leave much room for a false breakout. When the first target is hit, the stop on the second lot will be moved to breakeven. ·         Target: The first objective matches risk (60) at 0.84. A 0.8320 is more aggressive.

Trading Tip – Looking at market conditions, it is still very dangerous to look for range trades. Trends are widespread; and those pairs that have taken to congestion threaten potential breakouts. Certainly, the range seen in AUDCAD has a short shelf-life. The pair is closing in on the apex of a very steep, ascending wedge. This certainly raises the probability of a breakout; so for those willing to take on the high risk, our strategy is aligned the follow the direction of the likely breakout and abides by the larger trend. The past three weeks have seen a choppy rebound for the pair, and strong resistance has capped the otherwise mature wedge (formations that often break in the opposite direction of their original trend). Beyond aligning our position to the market, we have also set cautious orders to ensure we limit risk and retain acceptable profit potential. To further reduce the potential for an unfavorable break, we will cancel all open orders tomorrow or if spot hits 0.8150 first.    

Event Risk Australia And Canada

Australia – Risk sentiment easily overwhelms any other fundamental concerns for the Australian dollar. With the market looking to deleverage risk, investments that are based on Australia’s high benchmark rate are clear candidates. This sentiment is doubled by the dour interest rate and economic conditions forecasts. Australia, until a few months ago, was considered one of the few economies that would avoid the slump that was overtaking the US and Europe. Recently, however, investors and market commentators have seen that the slowdown is global and the Australasian dollar will have to find a balance as an equal to other economies that are looking to recession (like the US).  What’s more, the sharp drop in growth has led to a sharp drop in interest rate expectations – one of the key selling points of the Aussie currency. From the docket, data will merely gauge the health of lending and growth.

Canada – Over the past few weeks, the Canadian dollar has been driven down at an astounding rate as expectations that the economy would avoid the financial crisis, a recession and lowering lending rates have all been dashed. This has clearly highlighted the fact that the loonie was far overvalued when measured up to its global counterparts. However, this revaluation seems to have run its course. Fundamental market participants will now look gauge whether the Canadian economy is merely late to the global downturn or if it is genuinely on a stronger footing. Today, the government guaranteed up to C$218 billion in domestic bank debt – suggesting the market is a more fragile state that was initial expected. Elsewhere, interest rates and growth will take up the reins in the days ahead. September CPI numbers are expected tomorrow – and if they slow as expected, it could broaden the scope for ongoing rate cuts. More importantly, August GDP will cross the wires next week and reveal whether growth falls behind the financial crisis in demanding cuts.

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.