Loon/Kiwi Spread: What Will Break the Bearish Pattern?

Trade Exit

On July 29th the IMC blog initiated a long position in the Canadian dollar/New Zealand dollar spread at 4.75 cents (premium Canada).  The position was liquidated at 3.57 cents on September 1st.  This resulted in a loss of $1,180 per spread.

Canadian $ Kiwi $ spread (nearest-futures) daily

Canadian $ Kiwi $ spread (nearest-futures) daily

Despite the hit, we are ready to jump right back in on a recovery signal.  After all, the loon/kiwi spread has been historically undervalued for the last few months.  And over the last few years, dips below the 4-cent level have been followed by rallies of several hundred basis points.

The New Parameters

The December Canadian dollar/New Zealand dollar spread made an important price peak at 11.46 cents back in April.  Since then, the spread has not cleared a prior month’s high.

Furthermore, the spread has now made lower lows for four consecutive months.  The August and September lows were even new contract lows.

December Canadian $ Kiwi $ spread daily

December Canadian $ Kiwi $ spread daily

This pattern of lower highs and lower lows is bearish.  To alter the price structure and indicate that the downtrend may have come to an end the spread needs to clear a prior month’s high.  Therefore, the blog will use a close above the August high as a trigger to reenter a long position this month.  If that doesn’t happen by September 30th we will lower the entry price level.

More confirmation

Let’s continue to keep an eye on the 75-day Moving Average as well.  When the Canadian dollar/New Zealand dollar spread made closes above the 75-day MA in May 2014, April of 2015, and March of 2016 there was follow-thru of several hundred more basis points.  So a close above the 75-day MA for the first time since just before Memorial Day weekend could be a good confirmation that a new run higher is in full swing.

Trade Strategy:

Place a hypothetical order to buy one December Canadian dollar contract and simultaneously sell one December New Zealand dollar contract if the spread closes above the August high of 5.78 cents (premium Canada).  If filled, the spread will initially be liquidated on a two-consecutive day close 25-basis points below the contract low that precedes the entry.

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