Double CPI Day for the EUR & CAD
Certain weeks stand out in importance, and the week ahead is shaping up to be one of them.
On the economic calendar we have the Eurozone & Canada CPI as standouts for Tuesday, UK CPI & FOMC on Wednesday. Such action-packed weeks often provide the catalyst for the next move in the markets.
Our attention is currently drawn to the EURCAD for multiple reasons. Firstly, from a technical perspective, we see the EURCAD completing a head and shoulder pattern on a daily timeframe, which is generally associated with a trend reversal. This is further supported by the 200-day simple moving average, which has consistently marked out the trend for the currency pair. With prices recently crossing below the moving average, this could mark a change in the overall trend, potentially heading lower.
Further, when looking at the long-term chart, the 1.440 level has been a critical point of support & resistance across its history, with prices often either breaking through with momentum or stopping and bouncing off this level.
Looking at each leg of the EURCAD against the USD also reveals an intriguing setup, with the USDCAD trading near the resistance of a descending channel and the EURUSD breaking sharply below its trend support. Both indicate a potentially lower EURCAD.
Another interesting comparison we can make is the currency pair with its related markets. Both the Euro and Canadian dollar are deeply tied to the USD; thus, the broad dollar proxy should have some relationship with the pair. By overlaying the inverse dollar index (DXY) and the EURCAD, we see both are closely related with the Inverse DXY pointing towards a slightly lower EURCAD. The same observation applies when we overlay the EURCAD and the Inverse Crude Oil prices, given the correlation of the Canadian dollar with crude prices due to its oil-exporting nature.
With CPI numbers out for both economies next week, it is also worth looking at the economic data from both countries. From an unemployment rate perspective, the Eurozone is faring worse than Canada, a trend echoed when we look at YOY GDP. Both indicators suggest a frail Eurozone economy, likely making the central bank more cautious as it tries not to overdo policy tightening and risk sending the Eurozone into a deep recession.
On top of that, the recent guidance from both central banks reveals slightly different undertones. The Bank of Canada anticipates higher year-over-year inflation readings, while the ECB forecasts declines in headline inflation and harmonised index of consumer prices (HICP) readings. This further supports the idea that the ECB might be more dovish, while the Bank of Canada could lean towards a hawkish stance.
All things considered, the case for a lower EURCAD seems compelling based on the technical charts at key levels, comparisons with other markets, and central bank stances. We could express this view via the CME-listed Euro/Canadian Dollar with a short position at the current level of 1.440, take profit at 1.380 and stop loss at 1.457, offering a risk-reward ratio of 3.5.
Alternatively, the currency pair can be synthetically constructed using the more liquid Euro FX Futures and Canadian Dollar Futures. To establish a short position on the EURCAD, one can sell 2 EURO FX Futures and buy 1 Canadian Dollar Future. This approach approximates the hedge for the position, considering that each EURO FX Futures contract represents 125,000 Euros, and each Canadian Dollar Futures contract corresponds to 100,000 Canadian Dollars. At the current exchange rate of roughly 1.44, 1 Euro FX Futures contract is equivalent to approximately 180,000 Canadian Dollars, resulting in a 2:1 ratio. Each 0.0001 per Euro increment for the Euro/Canadian Dollar Futures is 12.50 Canadian dollars, while each 0.000050 per Euro increment for the Euro FX Futures is $6.25 and each 0.00005 per CAD increment for the Canadian Dollar Futures is $5.00.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
thoughtleadership.rbc.com/forward-guidance-our-weekly-preview/
ecb.europa.eu/pub/projections/html/ecb.projections202309_ecbstaff~4eb3c5960e.en.html
cmegroup.com/markets/fx/cross-rates/euro-fx-canadian-dollar.contractSpecs.html
cmegroup.com/markets/fx/g10/euro-fx.contractSpecs.html
cmegroup.com/markets/fx/g10/canadian-dollar.contractSpecs.html
On the economic calendar we have the Eurozone & Canada CPI as standouts for Tuesday, UK CPI & FOMC on Wednesday. Such action-packed weeks often provide the catalyst for the next move in the markets.
Our attention is currently drawn to the EURCAD for multiple reasons. Firstly, from a technical perspective, we see the EURCAD completing a head and shoulder pattern on a daily timeframe, which is generally associated with a trend reversal. This is further supported by the 200-day simple moving average, which has consistently marked out the trend for the currency pair. With prices recently crossing below the moving average, this could mark a change in the overall trend, potentially heading lower.
Further, when looking at the long-term chart, the 1.440 level has been a critical point of support & resistance across its history, with prices often either breaking through with momentum or stopping and bouncing off this level.
Looking at each leg of the EURCAD against the USD also reveals an intriguing setup, with the USDCAD trading near the resistance of a descending channel and the EURUSD breaking sharply below its trend support. Both indicate a potentially lower EURCAD.
Another interesting comparison we can make is the currency pair with its related markets. Both the Euro and Canadian dollar are deeply tied to the USD; thus, the broad dollar proxy should have some relationship with the pair. By overlaying the inverse dollar index (DXY) and the EURCAD, we see both are closely related with the Inverse DXY pointing towards a slightly lower EURCAD. The same observation applies when we overlay the EURCAD and the Inverse Crude Oil prices, given the correlation of the Canadian dollar with crude prices due to its oil-exporting nature.
With CPI numbers out for both economies next week, it is also worth looking at the economic data from both countries. From an unemployment rate perspective, the Eurozone is faring worse than Canada, a trend echoed when we look at YOY GDP. Both indicators suggest a frail Eurozone economy, likely making the central bank more cautious as it tries not to overdo policy tightening and risk sending the Eurozone into a deep recession.
On top of that, the recent guidance from both central banks reveals slightly different undertones. The Bank of Canada anticipates higher year-over-year inflation readings, while the ECB forecasts declines in headline inflation and harmonised index of consumer prices (HICP) readings. This further supports the idea that the ECB might be more dovish, while the Bank of Canada could lean towards a hawkish stance.
All things considered, the case for a lower EURCAD seems compelling based on the technical charts at key levels, comparisons with other markets, and central bank stances. We could express this view via the CME-listed Euro/Canadian Dollar with a short position at the current level of 1.440, take profit at 1.380 and stop loss at 1.457, offering a risk-reward ratio of 3.5.
Alternatively, the currency pair can be synthetically constructed using the more liquid Euro FX Futures and Canadian Dollar Futures. To establish a short position on the EURCAD, one can sell 2 EURO FX Futures and buy 1 Canadian Dollar Future. This approach approximates the hedge for the position, considering that each EURO FX Futures contract represents 125,000 Euros, and each Canadian Dollar Futures contract corresponds to 100,000 Canadian Dollars. At the current exchange rate of roughly 1.44, 1 Euro FX Futures contract is equivalent to approximately 180,000 Canadian Dollars, resulting in a 2:1 ratio. Each 0.0001 per Euro increment for the Euro/Canadian Dollar Futures is 12.50 Canadian dollars, while each 0.000050 per Euro increment for the Euro FX Futures is $6.25 and each 0.00005 per CAD increment for the Canadian Dollar Futures is $5.00.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
thoughtleadership.rbc.com/forward-guidance-our-weekly-preview/
ecb.europa.eu/pub/projections/html/ecb.projections202309_ecbstaff~4eb3c5960e.en.html
cmegroup.com/markets/fx/cross-rates/euro-fx-canadian-dollar.contractSpecs.html
cmegroup.com/markets/fx/g10/euro-fx.contractSpecs.html
cmegroup.com/markets/fx/g10/canadian-dollar.contractSpecs.html
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