CANADIAN DOLLAR FORECAST: USD/CAD PRICEACTION PRIMED FOR POTENTIAL REVERSAL
- USD/CAD surged nearly 3% over the last month and a half owing to widespread weakness in the Canadian Dollar, but the recent trend may soon reverse
- The Loonie has moved lower alongside appetite for risk as coronavirus fear rattles market sentiment and the price of oil
- A solid Canadian jobs market and sticky inflation stand to facilitate a firm monetary policy stance by the Bank of Canada (BOC)
The Canadian Dollar has dropped significantly since the start of the year with USD/CAD prices spiking roughly 350-pips off of January lows.
Spot USD/CAD is now trading slightly below the 1.3300 level – a major zone of technical resistance – that has potential to send the major currency pair ricocheting lower as it has previously.
USD/CAD PRICE CHART: DAILY TIME FRAME (MAY 2019 TO FEBRUARY 2020)
Confluent resistance around the 1.33 handle is also highlighted by the 61.8% Fibonacci retracement of last year’s peak printed by USD/CAD. As the Canadian Dollar putters around this key technical obstacle, strength in spot USD/CAD could soon dissipate with upward momentum already appearing to wane as suggested by the MACD.
| Change in | Longs | Shorts | OI |
| Daily | 43% | -21% | 2% |
| Weekly | -7% | 10% | 1% |
USD/CAD is still clinging onto its 8-day EMA, however, and may keep spot prices bolstered for the time being. If this technical level gives way, a reversal by the Canadian Dollar could accelerate and push USD/CAD down toward the 1.3200 area.
USD/CAD PRICE CHART: DAILY TIME FRAME (JULY 2019 TO FEBRUARY 2020)
Likewise, spot USD/CAD price action seems to be experiencing the start of a Bollinger Band ™ squeeze and is another encouraging technical development for Canadian Dollar bulls.
Other major technical trade levels for the Canadian Dollar can be derived using implied volatility calculated from forex options contracts.
Technical support and resistance levels can be estimated with a 1-standard deviation trading band, which is expected to contain underlying price action with a 68% statistical probability over the specified time frame.
That said, spot USD/CAD is estimated to fluctuate between 1.3265-1.3310 over the next 24-hours judging by its overnight implied volatility reading of 4.9%.
Meanwhile, spot prices might hold technical support of 1.3228 and resistance of 1.3368 as calculated using USD/CAD 1-week implied volatility of 3.8%.
CHART OF CANADIAN DOLLAR RISK REVERSALS & SPOT USD/CAD
Another technical signal Canadian Dollar currency traders may want to keep close tabs on are USD/CAD risk reversals.
The chart above illustrates a rolling 5-day moving average of spot USD/CAD and its various risk reversal readings across the overnight, 1-week and 1-month tenors.
A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection).
Nevertheless, downside risks faced by the Loonie remain. Uncertainty surrounding the ratification of the USMCA trade deal by Canadian Parliament still lingers despite formal legislative approval from the US and Mexico already.
Moreover, the adverse impact from a plunge in oil prices may start weighing on key inflation indicators tracked by the Bank of Canada.
If weakness in oil is sustained – perhaps due to ongoing coronavirus concerns – it could serve as a significant headwind to the Canadian economy and entice the BOC to capitulate to dovish market expectations as several other central banks did last year.
Keep Reading – USD Forecast: US Dollar Hinges on Virus Fear, Sentiment & Powell
-- Written by Rich Dvorak, Junior Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
