The December Canadian Dollar is down this morning in a follow-through break following yesterday’s dramatic sell-off from a 4-week high. The action in market suggests that traders are paying close attention to the headlines out of Europe and that the currency is being largely influenced by shifts in risk sentiment.
The driving force in the Canadian Dollar on Monday and so far this morning is the tempering of hopes that a bold plan for solving Europe’s sovereign debt crisis will be reached by this week-end as proposed. While the finance ministers from the Group of 20 nations talked up their contention that a comprehensive plan to recapitalize European banks as well as restructure Greece’s debt could be achieved within 5 to 7 days, the euphoria created by this belief was deflated when a spokesman for German Chancellor Angela Merkel hinted that a solution was only in the planning stages.
Daily December Canadian Dollar
With the Canadian Dollar trading at a level not seen since September 21, the currency quickly reversed direction after spokesman Steffan Seibert said the European Union meeting was only an “important step” on the path to a long-term solution to the bank capitalization and Greek debt restructuring problems. He also said the hopes and wishes of getting these issues resolved within the month “will again not be fulfilled”.
This chatter quickly led to a sell-off in the Euro as well as the commodity-linked currencies as traders abandoned risky long equity and commodity positions in favor of the safe-haven U.S. Dollar. The volatility created by the news and the subsequent trading action threatened to take back at least 50% of the rally from its October 4 bottom.
Technically the December Canadian Dollar formed a daily closing price reversal top on Monday that was confirmed by Tuesday’s weaker trade. Although the daily chart uptrend is not being threatened at this time, the chart pattern suggests the possibility of a near-term break back to a major 50 percent to 61.8 percent retracement zone. Based on the short-term range of .9367 to .9941, traders can anticipate a likely break to .9654 to .9586.
In addition to reaching the retracement zone target, the Canadian Dollar is also threatening to break through Gann angle support at .9767 this morning. A sustained trade through this former support angle could trigger an even steeper decline into another uptrending Gann angle at .9567 today. Combining the forecast of a break into the retracement zone and the Gann angle target creates a short-term bearish picture for the currency.
The dramatic shift in the market triggered by a softer tone regarding a solution to the lingering problems in the Euro Zone is likely to keep the pressure on the Canadian Dollar over the next few days. Traders seem to be exhibiting hyper-sensitivity to the news out of the Euro Zone, but they must realize that it works both ways. This means they should be prepared for increased volatility and the strong possibility of a two-sided trade although the news and the pattern suggest a developing bias to the downside.
