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USD/CAD Technical Analysis: Poloz Keeps USD/CAD Bid On Restatement

USD/CAD Technical Analysis: Poloz Keeps USD/CAD Bid On Restatement

Tyler Yell, CMT, Currency Strategist


Talking Points:

Quick Fundamental Take:

A lot of the chop in USD/CAD can be attributed to a “will they or won’t they,” question that the market has been asking around the Bank of Canada. A lot of the volatility around last Wednesday’s Bank of Canada meeting was an initially perceived hawkishness by the Bank of Canada followed by a disclosure that stimulus was discussed. When Bank of Canada Governor Stephen Poloz informed us that stimulus had been discussed, USD/CAD turned off of 1.3005 and did a moon-shot eventually moving towards 1.34 on Monday.

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On Monday, Poloz was speaking at the House of Commons when he mentioned that they would sit on the uncertain (i.e. bad) data and wouldn’t act for 18-months as they digested how the two-way economy was performing. USD/CAD immediately sold off on this news falling ~120 pips in a few hours. What surprised many was when Poloz came out a few hours later to clarify his comments that the market misunderstood. The Bank of Canada governor said the comment about inaction was about the output gap and not a forecast of rate direction.

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The price of USD/CAD has yet to recover the pre-comment levels near 1.34, but it’s worth noting when a central banker makes an effort to correct the understanding of a statement that resulted in a stronger currency. This could easily be interpreted as thinking a BoC rate cut is more likely than first imagined, which could continue to drag on the value of the Loonie.

Technical Focus:

A Leading Diagonal May Have Finished Providing Growing Evidence For Impulsive Advance

Chart Created by Tyler Yell, CMT

The chart above of USD/CAD looks crowded because, for months, the price action has been confined in the lower 1.30s. A key point about the choppy price action is that it has developed with higher highs and higher lows, which is indicative of an uptrend that should not be fought.

The focal point of the recent patterns in price alongside Stephen Poloz’s comments is that we could have just finished out a leading diagonal that took place from August 18 to October 7. The leading diagonal view is encouraged by the recent break above the pattern high at 1.3313, and the three-wave move toward a 50% retracement of the diagonal down to 1.3005.

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After trading down to the 50% retracement, there was a sharp turn higher as the USD Index seemed to go bid and nearly every currency was offered against USD including GBP, JPY, EUR, & CHF. A leading diagonal can trap traders (as it has me before,) because it looks like an ending diagonal, which precedes a sharp drop. A leading diagonal instead precedes a sharp rally, which may be the cast in USD/CAD.

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The slope of the rise from 1.3005 on Wednesday to 1.3397 on Monday likely favors a further advance that could continue on Canadian Dollar underperformance or USD strength. The next upside target is the 50% retracement of the January-May range at 1.3575. If 1.3575 breaks, we’ll be on the watch of the 61.8% retracement of the same range at 1.3838.

Key Short-Term Levels as of Tuesday, October 24, 2016


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