Buy CAD/CHF, 2Y/10Y UST flattener

This week we present two strategies: Buy CAD/CHF, 2Y/10Y UST flattener

CAD/CHF – Trend higher set to continue

Strategy Summary – Buy at market (.8558) for an objective of .8855. Place stop at .8395.

Since posting a low of .7810 on 19 March this year, the market has rebounded strongly. Recent attempts to sell off have attracted fresh buying interest over the .9400 handle and the 100-Day MA has now turned higher, indicating a shift in wider trend momentum. Further gains are anticipated as bulls look to recover ground lost during the August 2012- March 2014 down move.

Clearance of the current yearly high at .8590 and the 38.2% retracement of the .9905- .7810 fall at .8610 (Not shown) will open .8690 (3 October 2013 low) next. Through here we will target the 7 November 2013 high at .8855, which also coincides with the 50% retracement level (where we will look to take profits).

Attempts to sell off are expected to hold over the recent .8405 reaction low (15 September). Below will delay the advance but bears need to breach trend-line support (drawn from the 19 March/8 August lows) at .8365 and the 100-Day MA (currently at .8320) to cause greater concern.

2/10’s UST Yield Curve – Lower peak potentially developing

Strategy Summary – Look to buy at 214bp ahead of flattening to retest 184bp with scope for a break towards 143bp. Place stops over 221bp.

US 2/10’s recovered sharply off 184bp (28 August trough), reversing a steady 9-month flattening campaign. That said, the unwinding of RSI from overbought territory, coupled with a possible bear cross on the daily stochastic chart, suggests that the recent recovery may be losing momentum. Also, since the current steepener has retraced only a small portion of the 265/184bp decline, it is still considered as a corrective up-move. A stochastic bear cross would allow 2/10’s to flatten back towards 184bp. Below this would highlight another lower peak within the medium-term down-trend. This would open minor support at 165bp (16 May 2013) ahead of a re-test of the 143/134bp region (1 May 2013 trough)/(November/December 2012 troughs). Sustained weakness at that point would expose the key trough located at 118bp (24 July 2012).

A clean break above the 214bp area (2 July peak), however, would signal an extended recovery phase with scope for 221bp (11 June, near 219 – 23 October 2013 trough) ahead of resistance in the 235/245bp region (2 April/12 February peaks). Above the latter would then shift focus to the key peak at 265bp (31 December 2013).