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Canadian Dollar Outlook: USD/CAD Drops to Support, Will it Break Out?

Canadian Dollar Outlook: USD/CAD Drops to Support, Will it Break Out?

Peter Hanks, Strategist

Canadian Dollar Outlook:

  • The Canadian Dollar has fallen to a nearby trendline, a level that has held price afloat since late 2017
  • Forming a series of lower highs dating back to 2016, the longer-term price chart suggests a break lower may occur
  • Still, support at the 1.3025 level has proved resilient and could keep USD/CAD trapped in its 2019 range

Canadian Dollar Outlook: USD/CAD Plummets to Support, Will it Break Out?

The Canadian Dollar was held to a tight range in 2019 versus the US Dollar, amid a flurry of conflicting fundamental and technical themes. While little progress was made compared to the first few days of the year, USD/CAD was able to establish a series of lower highs over the months, which align with the pair’s longer-term downtrend dating back to 2016. Now, USD/CAD is in position to probe an ascending trendline from September 2017 in a move that could see the pair extend its longer-term losses into the new year if bears are successful.

USD/CAD Price Chart: Weekly Time Frame (January 2016 – December 2019) (Chart 1)

usd cad chart

To be sure, the area near which price currently resides possesses a substantial amount of technical influence within the broader picture and has the potential to refute a move lower. Enjoying support from the trendline around 1.3100 and subsequent buoyancy around the pair’s July swing low at 1.3025. Coupled with the relatively quiet holiday trading conditions, the technical barriers may well stall a move lower for the time being which could allow for another retest of resistance around 1.3200 or even 1.3350.

USD/CAD Price Chart: Daily Time Frame (January - December 2019) (Chart 2)

chart of usd vs cad

That being said, it may only be a matter of time until USD/CAD extends beneath recent lows. Although the Canadian economy is showing signs of weakness, the Bank of Canada’s sole mandate is to control inflation, effectively forbidding rate cuts in pursuit of economic expansion. Since inflation in the Canadian economy is running at or above 2%, the odds of a weaker CAD due to lower interest rates are diminished.

On the other side of the pair, we have the Federal Reserve. When taking stock of the interest rate differential between the two currencies over the last year, it should be of little surprise USD/CAD suffered. Now at the onset of 2020, the Fed has effectively placed itself in a holding pattern as it gauges economic growth and inflation – but has left the door open for further rate cuts.

Consequently, USD/CAD appears to be on a knife’s edge headed into 2020. As the pair runs out of room between the two converging trendlines, traders will have to decide which factors warrant the most influence over price and dictate the appropriate reaction. While I have a slight bearish bias for the longer-term outlook, I believe a serious break lower will likely require another test of resistance overhead before a larger move can develop in the new year. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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