Buying Loonie on a Pullback

Forex Trade Idea: 2014-07-14

After a quick pullback on weak Canadian jobs data last week, it looks like EUR/CAD sellers have quickly jumped aboard the longer-term downtrend.

EUR/CAD 4 Hour Forex Chart

EUR/CAD 4 Hour Forex Chart

EUR/CAD has been in a steady downtrend since topping out around 1.5500 back in March, with the turn lower sparked speculation and action by the European Central Bank to ease monetary policy. We’ve also see broad comdoll strength thanks to sentiment shifting towards risk-on over the past few months.

And last week, the weak Canadian Jobs data brought on a quick selloff in the Loonie that I think gives EUR/CAD bears a chance to not only play the price downtrend, but a fundamentally sound play. Besides the positive interest rate differential in favor of the Loonie (+0.85%), the data from Canada suggests positive things for the Loonie with upticks in exports, CPI, and retail sales.  On the other end of the spectrum, we continue to see mostly weak data points on the forex calendar from Europe, and it may take quite a while before the latest changes to monetary policy will have a positive affect for Europe.

With the price action and fundamentals lining up for this pair, I decided to short at market since there has already been a pretty strong reversal since hitting the Fibonacci retracement area/moving averages.  My stop is a wide one of nearly one weekly ATR, and my initial target is a strong area of interest that held as resistance between 2010 and 2011.  Here’s what I am doing:

Short EUR/CAD full position at market (1.4580), stop at 1.4780, initial target at 1.4300

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 1.00% of my account on this one, and with this trade structure, if I close at my initial target then my potential reward-to-risk ratio is about 1.4:1. I’ll re-assess my trade if it does get to 1.4300 area, but for now I’m leaning towards scaling into a larger positionand trailing my stop to limit risk–if the market gets there and the outlook for both currencies doesn’t change. And of course, anything can happen in the forex markets, so if the story does change, I’ll re-assess quickly and adjust if necessary. Stay tuned!