Forex Market Outlook: Will the Canadian Dollar Reach Parity With the US Dollar?

Dear Trader,

This is probably a question that many traders are curious about. Will the USD/CAD reach 1.0000? That is, will the Canadian Dollar reach parity with the US Dollar? Given the strong Canadian Dollar rally over the past few months, we may be inclined to think that the CAD is a raging bull on a warpath that is probably not likely to run out of steam.

However, I don't think the Canadian Dollar will reach parity with the US Dollar, at least not in the short to medium term, and there are reasons why I would suggest so.

(1) The Canadian Dollar rally is way overdone, with net CAD Longs at an extreme level. This is the perfect condition for a reversal (i.e. there is not enough buying pressure in the market anymore to drive the CAD up)

(2) Oil prices have a pretty strong influence on the Canadian Dollar. One of the reasons why the Canadian Dollar rally was so strong is because the increasing oil prices were supporting it, among other reasons. Oil has gotten so expensive lately that consumers are looking to other economical solutions to commute (i.e. carpooling, public transit, hybrid vehicles, etc.) . The increase in the supply of oil will definitely have negative pressures on the price of oil; this in turn will remove one of the pillars that are vital to a further Canadian Dollar rally.

(3) The US Central Bank rate is currently at 5.25%, still 0.75% over the Canadian Central Bank rate. Just this interest rate differential alone makes US assets more attractive than Canadian assets. Unless the Fed signals a rate cut and the Bank of Canada signals aggressive rate hikes, the USD/CAD will not hit parity.

Going long the USD/CAD right now would have a very high risk/reward ratio, given that prices are floating right around the 1.0510 price level, which is roughly the 20 Day Simple Moving Average. This has acted as pretty strong support in multiple sessions, despite the dip below that figure on Wednesday. Even if the USD/CAD revisits the all-time low at 1.0340 it will most likely not follow-through below that. I would recommend buying half your long position now and setting a buy order near the all time low at 1.0340 for the second half of your position. Place a stop around 1.0275, which if triggered then would indicate that USD/CAD is aiming for parity; but as I stated before, this is HIGHLY UNLIKELY.

The past week has been pretty choppy given the risk aversion environment in the markets right now, but as long as you give your trades a little more room to run their course then you should be fine.

Stay tuned for more Forex insights and tips, let's make some money!

To your trading success,

DC

Why You Should NOT Play the Japanese Yen..at Least Not Now..

Dear Trader,

There is good reason why you should NOT Play the Japanese Yen under the current market conditions....Volatility, and LOTS of it.

Volatility basically translates into risk, and LOTS of volatility means LOTS of risk, and unless you can stomach all that risk you should stay out of Japanese Yen positions, regardless of how confident you are.

You see, the Japanese Yen Carry Trade is fueled by the interest rate differential between the Yen and the other higher-yielding currencies. This is the main reason why people short the yen and go long other currencies; to capture the positive yield spread by holding the higher yielding currency and borrowing the lower-yielding currency.

Then, why doesn't everyone just do this? Simple....risk aversion.

When people feel that the market conditions are ripe for bearing risk, they will dump all their money into riskier, higher-yielding assets, such as US Dollar assets or New Zealand Dollar assets. But when there is trouble in the US Housing Market and credit market and some hedge fund suddenly has to liquidate all its assets, then people panic and start liquidating their risky assets and putting the money into lower-yielding, but safer assets (such as assets denominated in the Japanese Yen and the Swiss Franc). As a result, Carry Trades will be liquidated in mass quantities and will cause a ripple in the Currency Market.

In summary, at this time the market conditions are not really ripe for going either way, so it would be best to just stay out of playing the Japanese Yen for the time being and wait until the market conditions show a clearer direction of which way the Yen is going to go.

If you want to learn about a stress-free way of profiting from the Forex Market, without bearing all that risk and losing sleep at night, you would want to check this website out:

http://www.stressfreeforex.com

Stay tuned for more insights on the Forex Market!

To successful trading,

DC