Commodity currencies pulled back against the US Dollar this week as capital poured out of risky assets following a clearly negative reaction to US policy efforts and a decidedly ominous G7 summit. The MSCI index of world stock performance already pulled back over 6% and is on pace to issue the worst 5-day strech since the week ending November 20th. Are the Australian, Canadian and New Zealand Dollars positioning for another major collapse as risk aversion gears up in earnest? Our DailyFX Analysts offer their thoughts on the commodity bloc and reveal their picks for trading these currencies in the short term.
High yielding commodity currencies like the Canadian dollar are in my trading radar screen and I'm waiting for a good risk/reward technical setup to appear before I enter a long position in the USD/CAD. Indeed, I expect the world economy to continue to deteriorate significantly in 2009 which could create additional pressure on export dependent countries and lead to a significant shift of interest rate differentials in favor of safe-heaven currencies like the U.S. dollar. Moreover, investor's aversion towards risk taking remains the main driver of price action in the currency market and I believe the unwinding of carry trades is not over yet.
My picks: stay long USDCAD, against 1.2278, in preperation for breakout, target 1.4
Expertise: Technical
Average Time Frame of Trades:
As I've favored the last few weeks, the triangle that has been underway since October is probably complete at 1.2020. Price has rallied above the upper triangle line (although has pulled back today), which warns of a break above 1.2770 and then 1.3025. The breakout scenario is favored as long as price is above 1.2278.
Though risk trends may have stirred the dollar and yen crosses this past week, the commodity bloc hasn't shown nearly as much volatility and certainly little in terms of direction. Despite its exposure to the US dollar (or perhaps because of it), the USDCAD setup I laid out last week has treaded water ever since it was initiated this past Tuesday. As I had feared, the presence of stepped resistance beyond the short-term ceiling I was watching at 1.2525 would start curbing the market's advance quickly. In fact, the confirmed close above the aforementioned level would be the highest for the week - indicating a clear lack of follow through. And, though a short-term rising trend has developed to keep lows on the rise, I cut out when it was clear short-term momentum was turning back into the former resistance, new resistance. Entering a reduced position was the right thing to do (I am still waiting to take a full-sized speculative position when the pair overtakes 1.30). Looking across the Aussie, kiwi and Canadian dollar crosses, the same hesitancy is reflected. Significant levels have been - or are currently being - tested; yet there the necessary driver for a broad, fundamental shift in the market does not look to be on the horizon. This suggests that major breakouts and trend revival will defer to chop and ranges. This lack of drive represents a strong setup for AUDUSD. Broad congestion has developed; and the outlook for both the Australian and American economies are on generally even ground. Both are considered strong economies for their respective regions and their policy efforts have been extensive on both accounts. However, we should not simply expect calm markets ahead. There is a considerable yield differential between the two and they come in at opposite ends of the risk appetite spectrum.
For setup, the technicals are very promising. A rising trend from the October swing low has a very easy slope underneath four distinct swing lows. It is better to have a shallow pitch on trendlines as there is less pressure for retracements. What's more, this moving floor completes a very wide range with the double top at 0.7250/75. This offers a lot of room to move within the resulting range; so there is little impetus to force a breakout merely on the need for relief. Without a strong fundamental driver to dramatically shift risk trends (or specifically rally the dollar or drop the Aussie), this pair will find a natural pull to pull back within its range. I will look for for entry near the rising trend (now near 0.6340) and set a stop below the Feb 2nd swing low at 0.6250. My first target will equal risk. A second objective can look for a far greater percentage of the overall range with a trailing stop.
Currency Strategist
Terri Belkas
My picks: Long USD/CAD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 Day - 1 Week
USD/CAD has been holding within a large triangle formation for quite some time now, but we've started to see smaller consolidations lead to breaks higher. In fact, Tuesday's pop higher in the pair was one instance, and with USD/CAD having already testing the trendline that formerly served as resistance near 1.25, I think there are still bullish opportunities. Looking to get in near current levels, I would place a stop below yesterday's spike low of 1.2466 and set an initial limit of roughly 1.3000, where there are a series of spike highs from late 2008 , though I would also consider leaving positions open (and moving my stop higher) in the case we see USD/CAD break those highs.
Currency Analyst
David Rodriguez
My picks: Sell rallies in the AUD/USD
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks
I believe the Australian Dollar will continue on its overall downward trajectory, but I don't necessarily believe selling is a good idea at the moment. The currency has fallen substantially in the past several days, and though I consider myself a momentum trader, I think selling at this point offers pretty poor risk/reward. As such, I will be looking to sell big rallies in the pair in the weeks ahead. The combination of an outright rout in industrial commodity prices and a clear-as-day bear market in global equities leaves outlook for the risk-sensitive Australian Dollar very bearish. I will be on the lookout for good entry prices through the immediate future.
Currency Analyst
Ilya Spivak
My picks: Remain Long USDCAD
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
I bought USDCAD as the pair broke above a bearish channel. This week, prices rallied above the near-term range top at 1.2460. Continue holding long, looking for USDCAD to surpass the recent swing high near 1.2670 for another test of the triple top at 1.30.
Currency Analyst
John Rivera
My picks:Long USD/CAD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 2-4 Days
My long AUD/USD pick last week was good for 100 pips at the onset but failed to reach my target of the 50-Day SMA at 0.6739. The disappointing G-7 summit and more banking concerns offset any potential risk appetite that could be generated by the U.S. fiscal stimulus plan. Traders have had their hand on the trigger for sometime looking for any signs that a bottom is in place, but we may have seen them put their guns back in their holsters as it becomes clear that the current global downturn will deepen, which has lowered expectations for commodity prices. Therefore, I must take a bearish bias against the commodity dollars and with projections of oil inventories remaining elevated we may see oil prices continue to fall which may weigh on the Canadian dollar. The USD/CAD has been in a triangle formation since November which should lead to a breakout soon. However, I am concerned about Bollinger band resistance just ahead. A move below 1.2500 would change my bias.
Currency Analyst
Joel S. Kruger
My picks: Pending Buy USD/CAD @1.2635 for 1.3020 Objective, Stop @1.2535
Expertise: Technical Analysis
Average Time Frame of Trades: 1-3 Days
We have seen an ongoing contraction in volatility over the past several months to the point where we have finally reached the apex of a very prominent triangle that has defined trade since late October. Falling triangle resistance comes in by Tuesday's 1.2675 highs and we will be looking for a daily close above the latter to confirm a breakout which will ultimately trigger a fresh upside extension exposing a direct retest of the 1.3020 October 28 trend highs. Ultimately, the upside break should project gains back towards 1.4005 (2004 Highs) over the coming months (measured move objective based off of widest point of triangle). In the interim, the market has now taken out Thursday's high in the overnight session to trade to 1.2630 ahead of the latest minor retreat. We will use 1.2635 (just over today's high) as an entry point for a long trade in anticipation of this triangle break.
Fundamental Catalyst - Yesterday's close in the DJIA below the November 20 bear market low now officially confirms that the intense bear market remains in force. A well known economist and Dow Theorist cites in his daily piece that "most major bear markets end with stocks at "great values" or as some Dow Theorists put it, "below known values." This has meant in the past that price/earnings ratios for the Dow and the S&P have fallen to single digit numbers. It has also meant that dividend yields have moved into to the 5-6% zone. He goes on……"according to the latest Barron's, the P/E ratio for the Dow is now 18.62, 17.90 for the S&P. The dividend rate for the Dow is now 3.98%, for the S&P it is 2.78%. These are hardly the kind of figures I'd expect at a great bear market low."
This paints an extremely gloomy picture going forward and as things have been correlating, should once again translate into a flight to safety in the form of the USD. It would stand to reason that the bearish consolidation in the stock market over the past few months has coincides with the bullish consolidation in Usd/Cad. Therefore if equities are on the verge of another down-leg after yesterday's new low, this could prove to be a useful leading indicator for price direction in the currency pair.
DailyFX
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