EUR/CAD and Gold: Waiting for the Breakouts

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Last week we talked about two open trades to watch. This was because we still want to stay with the gold trade from previous weeks. But, we also saw a new opportunity emerge with the EUR/CAD currency pair. In both of these trades, we have seen a steady consolidation on the downtrend. There are many signs from technical analysis to indicate that breakouts might still be on the way.

A week has passed and while those breakouts have not happened yet, we still believe they are on the way. To some extent the EUR/CAD is a strength play on the USD/CAD relationship. However, even as the downward consolidations for both of these trades continue, it only helps confirm that a breakthrough is on its way.

Looking at the EUR/CAD situation

A report from Canada’s Bank of Montreal showed some interesting details on Canada’s overall economy. The western provinces will have major growth over 2%. The big reason for this is increasing resource development, especially with new technology to extract oil. This will help strengthen Canada’s economy over the long haul. The oil development can even help balance out the lower growth from eastern provinces. There are worries that the overall Canadian economy will only grow 2% as opposed to the 2.8% expected over the year but the long-term outlook is still good.

Europe, in the meantime, is not looking well. Austerity measures in many nations have not reduced debt balances because the job cuts and service cuts have forced several economies back into recession. Higher unemployment numbers further dampen enthusiasm for the Euro. While the European Central Bank has come out to say they would keep lower interest rates and be supportive of economic growth, not many people believe it. The problems the Euro-Zone faces strongly outweigh anything the ECB could do to fix things.

This view on the EUR/CAD currency pair is supported by the most recent movements of this pair. This showed not only the strength of the CAD, but also the weakness of the EUR. The CAD has also shown strength against the USD, putting it in a very strong place in the markets in general.

We are still looking for the downward consolidation to move into a breakout for this currency pair. This gives us potential to really cash in selling the Euro short as the CAD continues to strengthen in comparison.

Still paying attention to gold against the USD

The gold trade is still open as well. Since gold is tied to the USD, we continue to watch not only the value of gold but also the strength of the USD as well. Currently, gold prices are consolidating downwards. As the US continues to add jobs and the unemployment rate falls, the USD could strengthen against gold. Technical analysis shows us that the downtrend could very well lead to a breakout. Recent fundamental reports this week seem to support this interpretation, as well.

Europe’s inaction and the drop in US unemployment led to a sharp drop in gold prices. This confirms the idea that gold will drop against a stronger US Dollar. In the short term, this appears to be what is happening as talks of a double dip recession have all but disappeared for the United States. In the long term, it will be interesting to see if a struggling Europe will keep gold at a higher than normal price.

For our trade, we want to look at the specific reports this week. Just as the EUR fell against the CAD we also see here that gold fell this week against the USD. The ECB’s words about support are great, but they also said that no stimulus was on the way. With a stronger USD, this will drive down gold prices in the short term; maybe even towards a breakout from the downward consolidation.

Gold has fallen almost every day this trading week. This continued movement supports our claims of a downward trend heading towards consolidation. Keep an eye on this movement over the next few days – we are still waiting for that breakout.

So what does this all mean to us?

This week is very similar to last week, though we feel much closer to seeing the market breakouts. For both the EUR/CAD and the price of gold against the USD, we saw the price slide into a downward trend. We still expect that downward trend to go into consolidation before breaking out. In both trades, that is what we are still looking for and that is the trading opportunity for us to cash in.

We are looking for Gold to close below 1,603.64 with a Trend Finder arrow identifying a short trade.

We are looking for EUR/CAD to close below 1.2891 with a Trend Finder arrow identifying a short trade.

Good investing,
Jason Fielder

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