USDCAD Threatens Key Support - Scalp Targets Above 1.0050

The Bank of Canada maintained its benchmark interest rate at 1% this week with the central bank cutting its 2012 and 2013 growth forecasts to 2.1% and 2.3%, respectively. Although BoC Governor Mark Carney cited that, “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” the record rise in household indebtedness coupled with concerns regarding a faster than anticipated deceleration in China and renewed signs of contraction in Europe, are likely to keep the central bank on hold for the foreseeable future. Likewise, with the Fed continuing to soften its tone with regards to the willingness to take further steps to support the US economy, odds are we will continue to see the BoC take cues from its major counterparts. Although the Canadian dollar has remained well supported over the past few weeks, the USDCAD now faces significant support above 1.0050 which we will highlight in this report.

USDCAD Weekly

A weekly chart shows the USDCAD continuing to consolidate into the apex of a wedge formation dating back to the 2011 lows with the pair now probing below interim weekly support at the 23.6% Fibonacci extension taken from the July 2011 and April 2012 troughs at 1.0095. The pair currently rests just above the 52-week moving average at 1.0075 (a key level also highlighted on our daily chart below) with a close below this level accompanied with a move below the 50-mark in weekly RSI risking a decline down to trendline support, currently around 9925.

USDCAD Daily Chart

A look at the encompassing sees the USDCAD trading within the confines of a descending channel formation dating back to the 2012 highs with the pair now testing the near 3-way confluence of the 100-day moving average, channel support and the 100% Fibonacci extension taken from the June 4th and 28th crests at 1.0075. Note that a close below this mark exposes our bottom limit at the 61.8% retracement taken from the late-April advance at 1.0050. A move below this level invalidates our interim bullish bias with such a scenario eying subsequent daily support target at the 123.6% extension just above parity and the 138.2% extension at 9965. Initial daily resistance stands at the confluence of the previous July swing low and the 200-day moving average at the 1.01-handle.

USDCAD Scalp Chart

Our scalp chart shows the USDCAD consolidating between the 100% extension and channel support with a breach above interim resistance eying soft topside targets at 1.01, 1.0115, and the 78.6% extension at 1.0140. A break above this level offers further conviction on our directional bias with subsequent resistance targets eyed at 1.0165, the 61.8% extension at 1.0185, and the 1.02-figure.

A break below channel support exposes our bottom limit at 1.0050, which if compromised invalidates our bias. Such a scenario shifts our focus lower with support targets seen at 1.0030, 1.0010 and the 138.2% extension at 9970. Although we typically assign 25% of the daily ATR for our profit targets, a contracting average range in the loonie yields just 54 pips. As such, we will consider 1/3 of the daily ATR which yields targets of 17-20 pips depending on entry and may take longer to attain. Should ATR pull back dramatically, adjust profit targets as needed to ensure more feasible scalps.

*We will remain flexible with our bias with a break below our bottom limit at 1.0050 eyeing subsequent support targets. It’s extremely important in these market conditions to give added consideration regarding the timing of intra-day scalps with the opening ranges on a session & hourly basis offering further clarity.

Key Thresholds

---Written by Michael Boutros, Currency Strategist with DailyFX.com

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