’Make or Break’ For USD/CAD

2015-02-27 13:30:00

Kristian Kerr, Sr. Currency Strategist

Talking Points

Directional move looming in USD/CAD
1.2360 and 1.2525 levels look critical

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USD/CAD has spent the month of February in sideways to lower range. Bears would say the exchange rate has consecutive lower highs while bulls would probably call it a “pennant pattern”. We really just see it as a sharp contraction in volatility. Given the mean reverting nature of volatility this should mean that a sharp directional move in USD/CAD is not far off. The real question is in which direction?

There are a couple of ways to look at it. The failed push at the start of the week above the trendline connecting the year’s high and the mid-February high could be interpreted as a false pattern breakout. Some of the best directional moves in foreign exchange stem from failed pattern breakouts. The logic is simple. A good portion of the market gets trapped on a technical break in one direction and is then forced to stop out as the pattern fails to materialize resulting in momentum going in the other direction. Is that what is going on here? It very well could be, but it would take a move under the mid-February lows around 1.2360 to confirm this thinking and set the stage for a more serious decline. The fact is that as long as 1.2360 holds there is a very strong possibility that USD/CAD is still in the midst of the bullish ‘pennant’. Traditional technical thinking suggests that triangle formations should play out in at least five legs. The last leg was missing earlier in the week, but if the exchange rate can hold 1.2360 and gain traction over 1.2525 the technical outlook will turn quite favorable.

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USD/CAD Daily Chart: February 27, 2015