The IMC blog is working a hypothetical order to buy the December Canadian dollar/New Zealand dollar spread on a breakout above the August high. We’re going to update the parameters for this trade, changing both the contracts traded and the entry level.
First of all, we are now going to start tracking and trading the March 2017 contracts. The December currency contracts will be history in the next week or so.
Secondly, instead of waiting for a breakout above the August high, we are going to go long on a breakout above the declining 100-day Moving Average. The reason for this is that breakouts above/below the 100-day MA on the nearest-futures chart have been highly accurate in identifying trend changes over the last several years. More often than not, the move continued in the direction of the breakout for months afterward and the moves were hundreds of basis points in size. That’s tradable.
In addition, the Canadian dollar/New Zealand dollar spread had previously bottomed at 3.87 cents in March 2014, 3.97 cents in March 2015, and 3.84 cents in December 2015. This created a floor of support around the four-cent mark.
The four-cent support level was breached in September and the spread recovered a month later.
The spread once again sank below four cents in the second half of October. This time, it accelerated lower and posted a multi-decade low of 1.36 cents on November 8th.
But just two weeks later, the Canadian dollar/New Zealand dollar spread had rocketed back up to the four-cent mark and has been flip-flopping around it since. The fact that the spread just can’t stay below the four-cent mark indicates that it is undervalued down here. This is supportive of a long position. If we can combine that with a sustained close back above the 100-day MA for the first time since early June, it would greatly increase the probabilities that the spread finally makes a sizable run higher.
Cancel the order to buy the December Canadian dollar/New Zealand dollar spread and place a new hypothetical order to buy one March Canadian dollar contract and simultaneously sell one March New Zealand dollar contract if the March spread closes above the 100-day Moving Average (currently around 4.42 cents). If filled, the spread will initially be liquidated on a two-consecutive day close below the November 29th reaction low of 3.54 cents.