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USD/CAD Technical Analysis: Strong Reversal Puts Downtrend In Doubt

USD/CAD Technical Analysis: Strong Reversal Puts Downtrend In Doubt

Tyler Yell, CMT, Currency Strategist


Talking Points:

Quick Fundamental Take:

After a month near consistent losses against the Canadian dollar, the US dollar gained 2.6% or roughly 340 pips on the back of a widely anticipated rate hike, but a less anticipated hawkish tilt in the infamous Federal Reserve Dot Plot.

Before the Federal Reserve announcement, the Canadian dollar was pushing toward strong support of 61.8% Fibonacci retracement of the August to November range as well as the 200-day moving average and below the Ichimoku cloud.

Almost as if on cue, Janet Yellen reminded markets how unique the US dollar is in a world where other central banks are toying with the idea of further stimulus or currency depreciating actions to support net export growth. One of the key drivers of Canadian dollar strength has been the higher price of crude oil, which along with many other commodities turned lower following the Wednesday afternoon announcement and Crude has traded in a volatile ~8.25% range from the intaweek high and looks poised to close up week-on-week.

For Canadian Dollar Bulls, there was an unfortunate combination of a compelling thesis for further US dollar strength alongside disappointing Canadian manufacturing sales that were negative again in October. While the Bank of Canada has been less dovish than people initially expected, USD/CAD may resume higher in the choppy bullish channel shown in the chart below.

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

Going into Wednesdays Federal Reserve meeting, the Canadian dollar was the strongest currency in G10 FX. The Canadian dollar was able to exhibit strength notably against weaker currencies like the EUR & JPY on the back of CAD weakness themes deteriorating.

However, the hawkish Dot Plot from the FOMC turns focus again to the divergence in rate path of the Fed & the BoC. The BoC is expected to remain at 0.5% while the Fed is projected to raise interest rates three times in 2017 and 2018 with the scope of more aggressive policy should Fiscal policy in the U.S. induce higher inflation readings.

Technical Focus:

D1 USD/USD: Strong Push Off Channel Support, Failed Breakdown Moves Toward 1.3400 Resistance

Chart Created by Tyler Yell, CMT

The most important component on the USD/CAD chart is the strong bounce off of multiple levels of support all near 1.31/3075. This price zone combined the 200-day moving average, 61.8% Fibonacci retracement of the August – November price range, the Ichimoku cloud base, and the combination of the Modified Schiff Pitchfork / Trendline support drawn off key pivots of the May, June, and August.

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Looking above, you can see we aggressively moved back in the bullish channel. The median point of the channel is where we find ourselves on Thursday morning around 1.34/3450. This zone also includes an internal pitted on the move down from November – December that may act as resistance. If 1.34/3450 fails to hold this resistance, we would then anticipate a move beyond the November high of 1.3588 towards the channel top of 1.37/3750 on further USD strengthening.

Key Short-Term Levels as of Friday, December 16, 2016

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.


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