› Is it worth buying long-term call options for EUR/CAD cross-rate?

Is it worth buying long-term call options for EUR/CAD cross-rate?

EUR/CAD retraced to long-term technical support levels after a sustainable uptrend with the top of the market above CAD 1.57000 which had never seen in 9 months. Such a rapid bounce off the high-levels suggests that the cross rate has been extremely overbought in December last year. On the other hand, current prices represent an attractive level to add more volume in buying call options, as the longer-term trend remains bullish. Binary options traders wonder, is that price action attractive to enter the market? What are the fundamental reasons for such a sharp decline? What to expect from EUR/CAD in the nearest future? We’ll try to answer those questions in this review.

First of all, the plunge of EUR/CAD was related to the slide of USD/CAD as any cross-rate is based on two main components with the relation to the greenback. The loonie was gaining strength in the first two weeks of 2019, and many analysts started to predict a bright future for the currency. Some of the predictions included a scenario when the Bank of Canada should start hiking the interest rates immediately. However, the latest BoC meeting, rate decision and economic statement cooled off the heads of too aggressive buyers for USD/CAD put options. The lack of any significant development in the macroeconomic data forced BoC Governor to be more cautious in his press conference. Yes, the unemployment rate report showed an improvement in the labour market and Ivey PMI jumped, beating the analysts’ expectations. However, the general economic growth raised a lot of questions about the urgent need to renew the tightening cycle of the monetary policy.

It’s not a secret that the Canadian economy is export-oriented with a huge dependence on oil consumption from its Southern neighbour - the United States. Moreover, many macroeconomic reports are dependant on the price of oil, influencing the overall revenue volume for local exporters, oil producers and refineries. Currency speculators know about that dependence, playing out the oil price fluctuations with a similar mirror-mode on USD/CAD currency pair. WTI Crude faced a tough period in December last year, plunging for almost 40% since October's peak. That price action was immediately reflected on USD/CAD charts.

The same tendency was noticed in January 2019 but the opposite. The black gold price jumped after OPEC and Saudi Arabia announced a significant oil output cut, stabilizing the oversupply issue. WTI Crude breached $50 per barrel, adding almost 14% to its value in two weeks. However, the demand concerns remain as the global economic growth is under a threat from several sides: the economic slowdown in China, trade war tensions, alternative energy sources, etc. So, there are lots of doubts about the price of oil to continue its bullish rapid surge. That might leave the Loonie without a significant, if not main, fundamental support.

On the other side of the coin, Euro was comparatively strong recently. Despite some economic and political uncertainty in the European Union, EUR/USD bears failed to keep the selling pressure on the pair. Protests in France, German exports and manufacturing production slowdown and the Brexit saga - those reasons weren’t enough to keep weighing on the single European currency in the scope of downtrend continuation. Moreover, the recent price action showed higher lows and higher highs on the daily chart of EUR/USD, pointing to a potential uptrend beginning. Last week’s bullish achievements above 1.15500 technical resistance underline the demand for Euro, especially in the light of weak US dollar. The Federal Reserve expressed readiness to change the tightening monetary policy approach. Powell was rather dovish in his last press conference and FOMC meeting minutes confirmed that. EUR/USD has more than 60% of the market cap in the dollar index, measuring a volume-weighted basket of six major currencies, thus any decrease in the greenback’s demand across the board traditionally lifts Euro.

Technically speaking, the current daily price consolidates losses around crucial support range. The inability of the bears to break through long-term support of 55-days simple moving average (green curve on the chart below) represents a strong defence line for the bulls who did not hesitate to enter the market around CAD1.5150 lows. Moreover, most of the short-term speculators who were buying put options for EUR/CAD also stepped out, leaving the door open for a potential bullish retracement. An ascending trendline also comes here, supporting the price in the uptrend acceleration which started on November 12. Williams %R oscillator is deeply oversold with first signs of bullish divergence to start playing out the reversal pattern). The nearest target is slightly above 1.5300, the highest close in September 2018. If that horizontal static resistance was breached, a further upside pressure might take place with the range of 1.5450/5500 in focus. We would consider buying call options for EUR/CAD in the long-term perspective for deep-enough accounts and patient traders. The intraday trading strategy suggests seeking whipsaws for the buy-dips trading strategy.

Is it worth buying long-term call options for EUR/CAD cross-rate?


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