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USD/CAD Technical Analysis: CAD Slips On Oil Breakdown, Sentiment Keeps Eyes Up

USD/CAD Technical Analysis: CAD Slips On Oil Breakdown, Sentiment Keeps Eyes Up

Tyler Yell, CMT, Currency Strategist


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Talking Points:

- USD/CAD Technical Strategy: CAD Weakness Not Worth Fighting

- US Dollar Strength Favors Continuation of Move

- Trader Sentiment Shows CAD Bulls Are Fighting…And Losing This Battle

USD/CAD proved resilient for longer than most currencies against the US Dollar, but much like the strongly negative correlated US Oil Market, CAD could only hold on to support for so long before breaking. As Crude Oil fell through the August 24th low after OPEC announced they would raise their production output in an already saturated market, the Oil-reliance Canadian Dollar fell to multi-year lows against the US Dollar trading above 1.3500. Added to the frustration of lower Oil prices was the disappointing Canadian jobs data on Friday on the same day that the better-than-estimate U.S. employment data seemed to seal the fate for a rate hike on December 16th. Today’s move marks the strongest open/close range since October 21st, which kicked off the aggressive march higher that we’re now running. Now, we have a strong dollar, weaker US Oil, and we may hear from the Bank of Canada that they’re more willing to cut rates if the price of Oil continues to decline. Such a scenario (not a forecast) would only push this train further to the upside and likely toward the 1.3700/1.4000 handle.

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Now that USD/CAD is trading north of 1.3500, the preference is to buy dips on a move toward 1.3700/1.4000. The prior 2015 high of 1.3456 will act as weak support, but more preferential would be the Weekly Pivot of 1.3280. In the strongest uptrends, the Weekly Pivot and Weekly S1 Pivot level tend to act as strong support. The Pivot of 1.3280 also aligns with late November price support before the latest launch into new 11-year highs. Shorter-term traders looking for support above the Weekly Pivot can turn their attention to the November 30th and November 16th high of 1.3393 and 1.3371 respectively. Traders may find that these level that were acting as resistance before Monday's breakout could act as good support to buy with a better risk: reward ratio moving forward.

Trader sentiment is very telling in the current environment as is the spread in sovereign 2-year yields that are currently above 30bps, which favors USD strength to continue. Additionally, while the US Dollar is no longer the king of G10 as it used to be (that honor currently goes to the Australian Dollar), the Canadian Dollar is currently the weakest of the G10 when measured by occurrences below the 200-period moving average across all major currencies on a 4-hour chart. A lot of the weakness has to do with the story of Oil above, but there’s one last measure that could keep USD/CAD moving higher. Trader sentiment as measured by our Speculative Sentiment Index on USD/CAD stands at -2.72 as 27% of traders are long, and that is the most one-sided sentiment view from the G10 at present. .We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives a signal that the USDCAD may continue higher. As long as price doesn’t close below the Weekly Pivot of 1.3280 mentioned above, and the mentioned factors stay in place, USD/CAD could continue to look attractive as a premier ‘buy-the-dips’ in G10FX.

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