What goes up must come down, right? EUR/CAD shot up in August, so is it time for it to come down just as fast?
EUR/CAD Fibonacci Resistance?
At the beginning of the week, I pointed out that EUR/CAD could see resistance if it moved up higher into the Fiboanacci retracement area. Well, the bulls pushed the pair up higher ( likely on the latest round of risk aversion sentiment that hit the markets this week), enough so that not only was the 61% Fib level tested, but the major psychological level of 1.5000 was touched before the bears knocked the pair lower.
So, from a short-term technical perspective, we’ve got a pair with a quick run up to a highly probable resistance area and the stochastic signaling that the run may be overdone. And my buddy Big Pippin did a longer-term look at the price action, and he’s thinking the same thing that the odds are good the bears may take control around these levels.
From an economic story perspective, Europe continues to put out net disappointing economic updates (e.g., Scary German output figures propel recession fears), while Canada continues its run of positive updates with the latest coming from today’s net positive Ivey PMI data, showing an improvement in employment and prices conditions. Overall, Canada’s outlook is arguably net positive relative to Europe, which would likely keep the interest rate differential advantage the Loonie has over the euro (about 1.40%), even with central banks seemingly in a rate cutting mood around the world.
A risk to this short bias is global risk sentiment, which hurts the Loonie more than the euro if traders are in risk aversion mode, but that may be a little bit over done for now given the strength of the drop in global bond yields in the last week or so. Another risk to this idea is the upcoming Canadian employment update, but with the Ivey PMI signaling improvement in that sector of the economy, odds are more likely for a positive read than a negative one.
Given that all of this likely means the odds are good for a profitable short trade, I decided to short EUR/CAD at market. My stop is a little more than one weekly ATR from my entry, any my initial target is the recent support area where I will reassess and adjust if necessary. Here’s what I’m doing
Short EUR/CAD at market 1.4905), max stop at 1.5115, initial target at 1.4605 with 1.00% risk
I’m only risking 1.00% of my account on this trade and I’ve got a initial return-on-risk of around 1.39:1. I do look to add to this position if it does go my way, especially if the upcoming Canadian employment data and reaction to that news is positive for the Loonie.
What do you guys think? Let me know in the comments section below!
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