At around 3 AM today (Tuesday), I opened the first tracked forex trade at My Investment Analysis. All trade criteria (open, close, and adjustments) will be communicated through StockTwitsFX and Twitter. Analysis will typically be posted when a trade is “put on deck” and thus before a trade is opened.
We’ve opened a 1-unit long position on the USD/CAD cross at 1.0372 with a stop-loss at 1.0320 and an initial closing order at 1.0530 (Twitter announcement said 1.0550). The Risk-Reward ratio is roughly 3:1. Expected duration for the trade is 1-2 trading days.
In the past few weeks, the Canadian dollar has been fairly strong against the U.S. dollar, even though the U.S. dollar had rallied against most currencies. Right now, the Loonie has been touching the lower bound of its trading range as oil has rallied to $81 a barrel (a major Canadian export).
These factors have now made the pair sensitive to an upswing. The current position allows us to minimize our risk because there is a strong technical support for the pair in the 1.0350 zone and there is also a “intervention” support (more about this later) another 100 pips down.
First, let’s look at the long term trend:
Click on image to see Full-sized chart
As the graph shows, the Canadian dollar has been in a range for a few months. Additionally, it greatly appreciated against the U.S. dollar in 2009.
However, the probability of a downward movement around these levels are low (much lower in the 1.0200 zone) due to the Canadian government’s concern over currency appreciation. As this recent December 24, 2009 Wall Street Journal headline suggests (FOREX VIEW: Bank Of Canada An Obstacle For Canadian Dollar), the Canadian central bank is uncomfortable with the loonie trading at these levels. This is the “intervention” support I mentioned earlier.
Zooming in the daily chart for clarity:
Click on image to see Full-sized chart
The chart above shows the trading range of the loonie in the past couple of months. Unless there are significant news that justifies the pair to move down (e.g. FOMC minutes this week, U.S. Non-farm payrolls data, or a further big upswing in oil), I would buy more on a pullback to the multi-month low range.
Now, to the goodies (Hourly Chart):
Click on image to see Full-sized chart
The pair has tested the 1.0350 support area three times in the past few trading days. The recent two pullbacks appear to be forming a double bottom.
Lastly, the Canadian dollar, relative to its counterparts following similar trends (e.g. Euro, Australian dollar), has the best downside protection. Even if the “risk-appetite” trade takes hold or oil rallies, there Loonie appears to be relatively grounded. The Euro and the Aussie is in the middle of their trading ranges and are thus less predictable.
Risks to Watch:
The following will cause us to reconsider the position:
- Dollar returns to prior bearish trend (could be caused by FOMC minutes or other major data point).
- Oil rises substantially (likely a geo-political incident).
- Current positive market sentiment reverses.
Stay tuned on Twitter or StockTwits for updates
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