This Week’s USD/CAD Trading Plan Focused Around Following Oil and Equities Post... |
We want to try and create a trading plan using the recent moves in oil price as an indication for what may happen with the USD/CAD. The bias in this scenario is that oil prices will not be able to maintain their recent rally, and may fall down from the $95 level. If this happens, and we have a more general move toward caution in the equities market, then the USD/CAD has a chance to retrace its strong move in last week’s trading.
The basics of the set-up are as follows:
Trigger: Oil price test and failure at $95 level, risk appetite swings towards caution.
Scenario 1: Oil price fall back down to $90. This would require risk aversion in the markets. This could come from weaker equities as a result of poor fundamentals, or more dovish ECB, though key events in the calendar weigh more towards the second half of the week.
While US manufacturing data was stronger than expected, global manufacturing was still overall weaker in June. That should weigh on oil prices, especially as data from China shows its manufacturing sector cooling. With Saudi Arabia pumping out more oil and the release of 50 million barrels via the IEA the overall weak state of the US labor market should put downward pressure on oil prices. An expectation that oil prices will fall is therefore a major plank of this trading plan for the USD/CAD.
Scenario 2: Equities extend last week’s rally, meaning the 2-month downward correction could be over? That could imply continued relief in global markets from Euro news, though we have already started the week with some negative headlines.
Keys:
1. Oil prices.
2. US labor data, how will equity and commodity market respond to another month of weak US job figures? US retail sales report will give insight into strength of consumer spending.
3. Will Trichet signal that ECB will be on sidelines for a while after this week’s rate hike? Recent sovereign debt-concerns means the central bank may not want to squeeze periphery countries more so than it has too. Much rides on ECB’s interpretation of Germany’s growth and inflation prospects in how it goes forward.
A look at Oil:
Oil prices rebounded last week, as we had general risk appetite. The question is will the $95.80 level, which had acted as support in May and is a 61.8% retracement of oil’s rally from $83.80 to $114.80, now continue to act as resistance as it did the last 2 weeks? The scenario we are looking for would have WTI oil prices test and then bounced down off this level. That can set up a chance for a reversal in the USD/CAD. In scenario 2, oil prices would rally past this area, and retest the 50% retracement, and that would then favor a continuation in the USD/CAD.
The USD/CAD in 1 Hour Timeframe:
After last week’s close to 330 pip swing fro its high near 0.9910 to 0.9580, will we have a correction or continuation? The very strong bearish candles give us pause in buying at these levels and so we will try and follow oil prices and equities as key determinants in which scenarios plays out.
Scenario 1 Targets:
- First look for 0.9680, 50% mark from the upswing we saw throughout May and June.
- Second target would be 0.9735, next ladder up in the fibo scale.
Scenario 2 Targets:
- The important levels to the downside include the 0.9550 then 0.9520 levels, one a fibo retracement, the next an important pivot.
Fundamental Factors To Watch for Market Sentiment:
1. How Will US Equities Perform Following Such Strong Rally - A lot of the gain in CAD was off North American equities surging higher as we can see in the daily look at S&P below (click on the image for larger picture).
The index used the 200-ema (dark gray) as support following the one-and-a-half month decline that brought us down to 1256 from a high of 1372. The surge in equities the last week was the best performance in 2 years, a jump of 5.6%. But after feeding off the positive headlines from the European Greek debt crisis last week, this week the attention will turn inward.
From Marketwatch: “After five days of strong gains in the stock markets that were boosted by receding worries of a Greek default, eyes will likely turn closer to home next week to read the tea leaves of key U.S. economic data including June employment and retail sales reports.”
If economic data brings equities back down to earth, we could have the context for oil prices to fall as well, which could help us in the set-up of this USD/CAD trade. In addition to the jobs and retail sales data, we should also be mindful of the end of QE2 (which may or may not have been priced into the market during its decline in May and June.
2. Canada’s Fundamental Docket Highlighted by Employment Data –
For Canada, we started the week with a look at producer prices, which came in cooler than expected, and still have data on building permits, housing prices, employment change and the Ivey PMI on tap the rest of the week. The next Bank of Canada announcement is in 2 more weeks on July 20th, and market attention will be tuned it to see if the BOC takes a more dovish or hawkish tone throughout 2012. A hawkish tone could mean a rate increase in August, while a dovish approach takes us out to October.
- Consumer prices came in red hot in May, which can steer the BOC towards a more hawkish approach and helped the CAD to garner some of its gains last week, but today’s PPI report can mitigate some of the inflation pressures from the CPI as the PPI is a leading indicator for CPI.
- The Bank of Canada’s Governor skewed more to dovish language prior to the CPI report so we would like to see if it shifts sentiment in terms of the bank’s outlook.
- This week’s permits data and Ivey PMI (measures overall business conditions in services and manufacturing) should give us an inside peek into conditions in both housing and the general economy, while the most important indication of CAD direction will come from the employment report. Building permits had declined 21.1% in April, and are expected to bounce back with a 5.1% increase in May. The Ivey PMI, which reached a strong reading of 69.1 in May, is expected to show some cooling in June to 66.3. That is still strongly above the level of 50 separating expansion from contraction.
- While we saw higher CPI last week, we also saw April’s monthly reading for Canada’s CPI show a flat reading, showing some slowdown in the economy. The Ivey PMI was 57.7 in April, then rose to 69.1 in May.
- Expectations are for the Canadian economy to have added 12.7K new jobs in June, which would follow a 22.3K increase in May. Like the CPI report, this is a top-tier fundamental indicator that can help give the CAD direction at the end of the week.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
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