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USD/CAD Technical Analysis: Makes Your Neck Hurt, Doesn’t It?

USD/CAD Technical Analysis: Makes Your Neck Hurt, Doesn’t It?

Tyler Yell, CMT, Currency Strategist

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Talking Points:

  • USD/CAD Technical Strategy: Not Worth Fighting, To Pricy To Enter Long Now
  • 1.4175 Is Now ST Support, followed by 1.4050. If these levels hold, the upside is preferred
  • 1.3811 January 4th Low to Act as Swing Support

It has been a rough year for commodity currencies. Year to date, NZDUSD, AUDUSD, & USDCAD are down ~6%, ~5.5%, & ~4.25% respectively. The move higher in USDCAD since July ‘14 has been in lockstep with the move lower in WTI Crude Oil. It is appropriate to anticipate further CAD weakness, which would be displayed with USDCAD higher along with EURCAD, and lower CADJPY if this economic backdrop persists. Recently, we received word that Iran’s sanctions are expected to be lifted any day, which will only bring more supply to the market and is a top reason Crude is down ~5% today. However, the cycle now is that Oil declines because of supply worries, which causes equity markets to decline because of oil, and then oil drops further because markets seem to point demand is down. In short, it is a vicious cycle not worth fighting.

The recent ascent from May of 2015 has seen few retracements as it marched toward levels not seen since 2003. Looking across the board, it seems like USDCAD has little intention of slowing down whether looking at momentum via RSI, Crowd Sentiment Continues to Favor USD/CAD Gains, or trend following indicators like moving averages. On the sentiment chart below, you will also notice how stretched sentiment has become as traders have tried to push this pair lower in a futile manner.

USD/CAD Speculative Sentiment Index as of 1/15/2016

USD/CAD Technical Analysis: Makes Your Neck Hurt, Doesn’t It?

Recently, we shared with you how USDCAD hit three separate targets at the 1.4265/75 zone, but the market was not interested in stopping there. A reversal is rare, and often it is best to expect the extension as opposed to a reversal. While price can be lower from one day to the next, it is worth keeping an eye on the YTD low of 1.3811. By focusing on the 1.3800 support level, we can take ourselves out of the 80% of retail traders fighting this move. When a trend is as strong as USD/CAD has been, we want a safe distance between spot and a key support level so that we are not sucked into selling a small dip in a strong uptrend. Another good support level is the 21-day moving average at 1.4028. Further CAD depreciation beyond today’s high of ~1.4550 would turn attention to 1.4665, which is the 78.6% retracement of the 2002-2007 range, and with the trend in US Oil, this seems like the more probable bet than a reversal.

T.Y.

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USD/CAD Technical Analysis: Makes Your Neck Hurt, Doesn’t It?

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