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USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

2016-11-11 20:45:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

  • USD/CAD Technical Strategy: Upside Remains Favored On Trump Victory
  • Commodity FX & EMFX Remain On Uncertain Ground Post-U.S. Elections
  • Trump Expresses Warmth Toward Canadian Economy With Trudeau

Quick Fundamental Take:

The Canadian Dollar has continued to be a victim to USD strength in the wake of the U.S. Elections. The Canadian Dollar has traded at its weakest levels against the U.S. Dollar since February when a large retracement took USD/CAD from a high of 1.4688 down to a low in early May of 1.2460. Like other commodity currencies, the Candian Dollar has traded as a lower-Beta form of EMFX, which were hit hard by the surprise election result. The recent price action of USD/CAD has validated the uptrend that has unfolded in a choppy fashion since early May.

Access Our Free Q4 Dollar Outlook As The US Dollar Faces An Unorthodox Presidential Election

Another key component of the Canadian Dollar weakness has been the additional weakness in the price of Crude Oil that has accelerated on the further uncertainty of an OPEC accord in Vienna at the end of the month. Canada has already seen its dollar weaken on the large economic impairment of an economy with Oil around $50/bbl. However, there continues to be uncertainty about how the trade balance will be affected by the Trump Administration that takes office in January 2017.

A quick glance at the destination of exports for the Canadian Economy shows that Canada has a lot of vulnerability to both the upside and downside should the NAFTA agreements get restructured.

From a Trade Perspective, Nothing Comes Close To Canadian Exports to U.S.

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

Data Source: Bloomberg

Many traders have looked at US Treasury yields post-Election as an indication of what is expected from Central Banks. Yields have moved higher, however, the spreads of sovereign debt against the U.S.10-year, which can be seen as a proxy of the inflation expectations as well as the Federal Reserve’s policy rate path has widened following the election. The US 10-Yr yield has risen in yield by 23%, which has included the largest intraday move in UST 10Y yields on record, which further shows the inflation pressures possibly facing the US, while other economies may need to introduce further easing, which would further drive the pairs in favor of the USD.

US 10YR Yield To Maturities Yield To Maturity Rises Sharply As Price Drops On Election Outcome

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

Data Source: Bloomberg

Having a Hard Time Trading USD/CAD? This May Be Why

Technical Focus:

D1 USDCAD: Upside Is Beginning to Accelerate Aggressively

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

Chart Created by Tyler Yell, CMT

The weakness in the Candian Dollar has aligned with the trend shift that we’ve been focusing on since the price broke above the Ichimoku Cloud and was followed by the momentum line. We continued to favor upside based on both the charts and fundamental story developing this week.

If price remains above the Ichimoku Cloud, the path of least resistance remains higher, and we could be paving the way for an aggressive rise as we move from a leading diagonal to an impulsive wave ‘iii’ of ‘C’ in Elliott Wave terms. 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.

The recent turnaround off of 1.32647 provides a base that we can look to as a foundation for advancing the uptrend. As long as the price stays above this level, we would expect upside pressure to grow.

In addition to Elliott Wave and Ichimoku, we have added a Modified Schiff Pitchfork applied to the chart above. The Modified pitchfork originates the median line from the 50% retracement of price and time of the point of X and A. The Modified Schiff Pitchfork places a helpful frame of price action, which looks to be showing a breakout above the channel that USD/CAD has traded between with a rising slope. A break above the 50% retracement of the January-May range would be an early indication of a strong breakout.

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In addition to the short-term volatility, we’ll continue to favor buying support (not a trade recommendation), as the potential for a strong move higher continues to build in USD/CAD.

The next upside target is the 50% retracement of the January-May range at 1.3575. 1.35572 is also the 100% Fibonacci Expansion that aligns with an equal wave off the August low that would match the May to July rise. If 1.3575 breaks, we’ll be on the watch of the 61.8% retracement of the same range at 1.3838.

A few of the support levels that would need to break to change the tune from Bullish to Neutral is 1.3312, the 38.2% Fibonacci Retracement of the Jan-May range followed by Today’s low of 1.3264 that was mentioned above.

Key Short-Term Levels as of Friday, November 11, 2016

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

T.Y.

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