Looking to hop back on the Loonie bull train as recent positive Canadian data updates point to a rosier outlook.
EUR/CAD Support Breakout?
On the daily chart of EUR/CAD above, we can see the pair has been in a clear downtrend, which actually goes all the way back to March 2018 when it peaked around 1.6100. But recently, the pair has had a tough time breaking a major support area around the 1.4450 – 1.4500 handles…at least until today when the pair broke to fresh three month lows to retest the 1.4400 area.
I’m guessing the recent bearish move is likely on a broad shift in risk sentiment, which has been very negative due to the Coronavirus outbreak last month and the accelerated rate of spreading, but those fears seem to be toning down now after reports of a slowdown in the rate of new cases. Not only did this shift global risk sentiment towards positive, but we also saw a rally in oil this week, which also likely supported Loonie bulls over the past few sessions.
Outside of global risk sentiment, Canada has actually been surprising traders with a string of net positive economic data lately (Canada’s Ivey PMI shows accelerating economic activity in January, Canadian employment increased by 35K (+0.2%) in January, all in full-time work. The unemployment rate fell 0.1% to 5.5%). This likely reduces the odds of a rate cut from the BOC, which currently boasts some of the highest interest rates among the major central banks.
Overall, this makes me lean towards the bull camp for the Loonie once again, and I’m going to pair that with the euro, which seems to be taking a hard hit as traders get out of lower-yielding assets.
Looking forward, we’ll get Euro area quarterly economic updates (GDP & Employment) this week to hopefully spark some action, as well as CPI data next week from Canada. And next week will be a busy one for both economies as well with the flash manufacturing PMIs from Europe being the likely big catalyst to get this pair moving. But in all likelihood, global risk sentiment will continue to be the main driver for the pair, which looks to be positive for risk if the rate of new Coronavirus cases continue to slow and we continue to see stimulative efforts from global central banks.
With all of that said, I’m taking a longer-term short position on EUR/CAD, going in at market after the support break with a nibbler position for now. I’ll look to add to the trade after checking out the upcoming data, but for now, I’m keeping it small with a wide stop. Here’s what I’m going to do:
Short half position EUR/CAD at market (1.4407), max stop at 1.4570 with 0.50% risk, max target at 1.4105
I’m only risking 0.50% of my account on this trade and I’ve got max potential return-on-risk of around 1.85:1. It’s likely I’ll add to this positive if the upcoming data contributes to the bearish argument, and if not, I’ll look to close the trade down manually, especially if global risk sentiment turns negative once again.
What do you guys think? Are you watching EUR/CAD for a potential short position as well? Let me know in the comments section below!
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