Extremely Bullish USD/CAD to Face Canadian Employment Numbers, US Nonfarm Payrolls
Eric Furstenberg • 4 min read
With the ECB rate decision and press conference out of the way, tomorrow’s (Friday’s) US and Canadian labor market data could end off the week on a high note with some tradable market volatility.
The ECB caused some action today, but not nearly as much as I’ve seen in the past. I have to say, the market isn’t as active as I’d like it to be, and the really great trends are not very abundant at the moment. Let’s look at a few instruments, starting with the USD/CAD:
USD/CAD – What a Mighty Advance!
USD/CAD Daily Chart
What a remarkable advance on the USD/CAD! This is quite a long wave in terms of time and distance. This should serve as a warning to traders who are interested in entering long positions at this late stage. You see, the price has extended rather far from the mean value (presented by the 20-EMA) and the pair is fast approaching an important resistance zone where we can expect some profit taking by the bulls, and even some short-selling by the bears. Now whether it be profit taking by the bulls, or short-selling by the bears, the effect is the same: the US Dollar will be sold against the Canadian Dollar. Needless to say, these actions would weigh on the USD/CAD exchange rate.
Let us not forget that exchange rates can move in one direction for extended periods of time. This is important to keep in mind because although it looks like this pair could become exhausted soon, it doesn’t mean that we should start looking for selling opportunities all of a sudden. When we see strong bullish momentum like in this case with the USD/CAD, we need to respect that momentum until we encounter a valid reversal signal. If you asked a little boy how he would catch a ride on a fast moving train, he would certainly reason that the train would have to stop first. It is the same with strong impulsive moves like this one on the USD/CAD. The average daily turnover on the USD/CAD is about 275 billion USD. Think about it this way, there is a massive amount of weight and momentum behind this last bullish wave; it’s not necessarily going to stop here just because it’s approaching an important resistance zone, and because it has become really overbought. Do you think you have the resources to resist this kind of order flow? Perhaps, but probably not. Whether you’re buying or selling a particular currency pair, it’s mostly better to wait for the current momentum (if very aggressive) to slow down before entering with, or against it. Going against momentum is obviously more technical, and requires much experience and a solid reversal signal.
So what kind of approach should we use when trading this pair? The bullish momentum is still intact, so our bias should be bullish. However, if you’d like to buy this pair now, you need to be aware that a reversal or a correction is becoming more and more probable with every new bullish day that is printed. This kind of advance also tends to slow down as it approaches an important resistance zone.
We need to trade high-probability setups. These setups mostly occur closer to the mean value of a trend. Thus, it would be better to wait for the current momentum to slow down and give the 20-EMA some chance to catch up. Entries may then be taken at, or close to the 20-EMA if it is observed that this exponential moving average is holding up as dynamic support (or resistance). How will we know if this is the case? If we see that the price rejects off of the EMA, and prints satisfactory candles to confirm this rejection this will give us a good clue. Of course, we can use triggers on smaller timeframes, but only if it aligns with the technicals on the daily chart.
The oil price has declined aggressively in the last two days. This has also punished the Canadian Dollar. Keep an eye on the oil price if you’re trading the Canadian Dollar: these two are highly correlated.
On Friday, the much anticipated US nonfarm payrolls report could cause substantial volatility in the FX market. Canada will also release labor market data at exactly the same time (13:30 GMT). This will make trading the USD/CAD interesting on the day. If we get a really great number out of the US, and a really poor number out of Canada, the USD/CAD could be the perfect US Dollar pair to buy.
The ADP Nonfarm Employment Change number which was released on Wednesday is often a good indication of how the NFP numbers will fare two days later. Now this number was really great and came in at 298000 new jobs compared to an expected reading of 190000. Really impressive, isn’t it? Perhaps the NFP numbers will be really great this month, which thing would further establish the market’s expectation of another US interest rate hike next week Wednesday (15 March). Let’s see what happens tomorrow.
AUD/USD – ‘Down Under’ the 200-MA Again
The AUD/USD has declined in the last couple of days, as expected. This came after the pair recently traded right into an important resistance zone. I personally traded this setup and entered short on 28 February. Look at this daily chart:
AUD/USD Daily Chart
It’s good to see this pair trading below its 200-day moving average again. The price is also relatively far below its 20-day exponential moving average, which testifies of its strong short-term bearish momentum.
It certainly looks like we could expect further downside on this pair in the next few weeks. If you also have short exposure to this pair, be careful with the NFP report tomorrow. Make sure you manage your risk carefully.
Have a great NFP Friday!