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USD/CAD Technical Analysis: Hanging By a Bullish Thread?

USD/CAD Technical Analysis: Hanging By a Bullish Thread?

Tyler Yell, CMT, Currency Strategist


Talking Points:

- USD/CAD Technical Strategy: Waiting To Sell If Support Breaks

-Looking to Bounce In WTI Crude Oil for Directional Cues

- US Dollar Also Providing Support for USDCAD, Break below Support Opens USDCAD Downside

A clear theme closed out the week. The theme was outperformance for most commodity-based currencies. Typically, commodity currencies are economies like Australia, New Zealand, and many Emerging Markets like the Russian Ruble, South African Rand or Mexican Peso. Of course, the Canadian Dollar counts among the ranks of Major currencies with a reliance on Oil as they are the 6th largest oil producer in the world. However, the Canadian dollar diverged from currencies above this week in relation to relative performance vs. the US Dollar. Currencies like the South African Rand closed up over 3% while the Australian Dollar is looking to close up on the US Dollar by 1.5%, but the Canadian Dollar ended the week nearly flat. One of these markets are telling the truth about what’s to come in FX, and another is not. Unfortunately, the answer isn’t exactly clear about who to believe right now, but US Dollar Index strength currently favors that USD strength could continue.

This week proved once again that the Canadian Dollar appears uncomfortable around 1.3400. Whether that is due to underlying CAD strength or waning interest in the US Dollar at these levels is hard to say. The latter appears favorable as many CAD crosses look distinctly negative. However, it’s difficult to encourage a trade against the larger uptrend until we break key support of 1.3222/25 that houses the November 12th low and the 55-dma near 1.3190, which USDCAD tends to respect for large directional bias. Additionally, a break above short-term resistance at 1.3349, the November 13th and late August high could signal that an attempt on the late September and YTD high of 1.3456 or higher.

The Canadian dollar wasn’t without reason by ending the week roughly flat vs. the US Dollar. Given the positive correlation between WTI Crude Oil price, the fact that WTI dropped to near $40 trading at its lowest price since August 27th and Oil is heading for its 3rd straight week of losses, it makes sense that CAD is under pressure. However, if either the US Dollar is about to fall or the other currencies mentioned above are telling a story about what’s to come for Commodity Currencies like the Canadian Dollar, then the USDCAD sell is a bargain. However, the data isn’t quite there. A daily price break and close below the RSI(5) trendline support, as well as price breaking below the first level of support, mentioned at 1.3222, would help to validate the view that further downside is likely. Until then, we’ll sit tight while we see whether the Canadian Dollar or other commodity currencies are telling the truth about what’s to come.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.