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Sharp CAD Reversal Negates USD/CAD Bull Flag, Stuns EUR/CAD, GBP/CAD

Sharp CAD Reversal Negates USD/CAD Bull Flag, Stuns EUR/CAD, GBP/CAD

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- CAD posting large turnaround after Tuesday merger announcement.

- USDCAD, EURCAD, GBPCAD all break through significant support.

- US Dollar strength in August shouldn't surprise - it's a seasonally strong month.

One of our primary focuses during these last few summer weeks has been on exploiting Canadian Dollar weakness, in particular against the British Pound and the US Dollar. Even as recent as yesterday did it appear like USDCAD was ready to break through recent resistance near C$1.0985, on route to 1.1240 and above.

Today's charts tell a very different story about the Canadian Dollar, across the CAD-complex. In USDCAD, 1.0985 held as resistance and instead price swung lower and broke down through the rising trendline rooted in the July 11 swing low.

USDCAD Daily Chart: January 2014 to Present

Sharp CAD Reversal Negates USD/CAD Bull Flag, Stuns EUR/CAD, GBP/CAD

In GBPCAD and EURCAD the stories are similar: recent lows established between May and July knocked out as support. For EURCAD, this may particularly perilous as the uptrend supporting price from the August 2012 and May 2013 lows was taken out in the process.

As we (as humans) are always trying to find an explanation to a series of events, we can't help but embrace our neurological instinct and take a stab here.

It is possible that, in the vaccuum of summer trading (lower volume, lower volatility than other non-holiday periods of the year), the cross-border US-Canadian merger between Burger King and Tim Horton's, an explicit tax inversion deal done to skirt the world's highest corporate tax rate in the United States, has moved the market.

Due to the fact that Burger King, a US entity, is buying Tim Horton's, a Canadian entity, it needs to exchange USD into CAD to transact the deal. At $11B, significant capital flows can be generated, perhaps enough to sway the entire CAD-complex. Indeed, the timing of the CAD turnaround and the announcement of the deal is too coincidental to ignore.

See the above video for technical considerations in USDCAD, GBPCAD, and EURCAD.

Read more: Euro Exposed to Fresh Lows as Draghi Invites New QE Speculation

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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