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Trading Weak Versus Strong: GBPCAD

by on November 3, 2013 3:12 am BST
 

When analyzing pairs for opportunities, it is best to determine the strong and weak currency within a given pair. This gives versatility and flexibility when determining which opportunities to take advantage of. For instance, the British Pound may be strong against the euro but weak against the majority of its peers. It would be foolish to short the EURGBP simply hoping the overall bearish tone of the Pound would flow towards that pair because it may not. It is okay to long EURGBP and short GBP??? if that fits the trading plan. It may also serve as a hedging purpose. Nevertheless, determine the strong and weak currency in that pair, and then determine if it is worthwhile.

For instance, the Pound is up against the euro due to the speculation that the European Central Bank (ECB) will cut the benchmark rate by 25 bps, but it is down against many other peers because of the expectations that the Bank of England will not raise interest rates. The Canadian dollar has seen a major boost due to higher than gross-domestic product. GBPCAD has seen pressure since rejection from the upper trend line of a channel.

In this particular scenario, the Pound is the weaker of the two currencies in the GBPCAD. This would offer the opportunity to short the weak pound, subsequently longing the stronger Canadian dollar. Minor crosses offer great potential to trade discrepancies in major currencies due to fundamental events, and sometimes technicals.

1D Chart of GBPCAD

1D Chart of GBPCAD

The GBPCAD has seen substantial downside due to general GBP weakness and strong CAD sentiment. The recent session’s price action had broken through support with increasing moment. There is a -DMI crossover on the ADX, and continued pressure on the Pound could push through the channel. A price action target of 1.6440 is expected.