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Michael O’Neill December 7, 2016
GBPCAD in Battle of the Bands
Background: It’s a battle of the bands. No not an epic AC/DC-Guns “N Roses style clash but a more mundane currency range. For the past month, GBPCAD has bounced erratically within a broad 1.6600-1.7100 trading band. After peaking at 1.6982 on December 6, GBPCAD plunged to 1.6687 on December 7 undermined by on-going Brexit concerns and a spate of soft data reports.
USDCAD is torn between widening CAD/US interest rate differentials and rising oil prices.
GBPUSD short positions are still very large and the currency pair is vulnerable to a further short squeeze on the approach to year end.
USDCAD has dropped, coinciding with the rally in oil prices. WTI’s inability to break above the long-term downtrend line at $53.60 risks renewed selling on profit-taking. The Bank of Canada opened the Dorr (slightly) to a rate cut in October and the December 7 statement is likely to be doveish, limiting USDCAD downside.
The intraday GBPCAD technicals are mildly bullish while prices are above 1.6675, looking for a break of 1.6770 to shift the focus back to 1.7000.
The risk of another bout of GBPUSD short covering into year-end combined with a doveish BoC statement suggests another visit to the top of the GBPCAD range.
TRADE IDEA RISKS
This idea is risky as it is a counter-trend trade. It is vulnerable to a resumption of the GBPCAD downtrend which has been intact since January 2016. The trade is vulnerable to fresh negative Brexit rhetoric which would undermine GBPUSD and by default GBPCAD. It is also vulnerable to higher oil prices. A spike in WTI from current levels could result in the stop being triggered.
The 1.6686 level should be watched closely as it is the 100-day moving average and could halt a topside rally
TRADE IDEA PARAMETERS
BUY GBPCAD: ½ normal position size at market (currently 1.6740) Balance at 1.6690
STOP LOSS: 1.6645
TAKE PROFIT: 1.6970
TIME HORIZON 3 days
The intraday GBPCAD technicals are modestly bullish while prices are above 1.6660 looking for a break of minor resistance at 1.6770 to extend gains towards the range top.
GBPCAD daily with 100 day moving average noted