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USD/CAD Rate Forecast: US Dollar Drop Allows Canadian Dollar Strength

USD/CAD Rate Forecast: US Dollar Drop Allows Canadian Dollar Strength

2018-08-28 16:30:00
Tyler Yell, CMT, Currency Strategist
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Canadian Dollar Rate Forecast Key Takeaways:

  • The ONE Thing: In anticipation of a trade deal, the Canadian Dollar strengthened to the strongest level in two months on the hopes that the deal with Mexico and the United States will open the door for a positive outcome for the Canadian Economy despite US President Trump’s threats that Canada could be “left out.”
  • Canadian Economic data is consistently outpacing economists’ expectations per the Citi Economic Surprise Index. The strong beats could put the Bank of Canada in a more positive stance than previously expected that could further support the CAD as USD may trade softer as Fed action is fully in the price.
  • Technical Outlook: The Canadian Dollar has accelerated recently below the 100-DMA as well as the 200-Week DMA suggesting that momentum may build in favor of the Canadian Dollar and against the US Dollar.

Key Technical Levels for Canadian Dollar Rate to US Dollar:

  • Resistance: C$1.3001, March 7 high
  • Spot: C$1.2922
  • Support: C$1.2818, 50% Fibo of 2018 range

Canadian Economic Data is Strongly Beating Expectations

Central bankers are infamously data dependent, and that could be a good thing for Canadian Dollar bulls. A look to the Citi Economic Surprise Index for Canada shows a sharp turnaround in economic data that Stephen Poloz, head of the Bank of Canada, and his crew will have a hard time ignoring.

The Bank of Canada has sat on the fence on whether to pushtoward a tighter monetary policy regime as trade wars and NAFTA negotiations linger. Recent developments of a one-two punch of positive North American Trade Deals and little evidence that the barking between CN President Xi Jinping and US President Trump are having material negative effects, and if anything, may lead to more trade, not less.

The Canadian Economy Is Humming, Eh?

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Chart Created by Jake Schoenleb, @SchoenlebFX, Source: Citi, Bloomberg

USD/CAD Breakdown Turns Focus to 50% Fibo at C$1.2818

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

USD/CAD has strongly broken below rising support showing underlying CAD strength. The issue traders need to address is the longer-term trendline resistance shown above, and what it could mean to the US Dollar if it holds. Institutions hold excessive bullish sentiment and long positions on USD that may unwind and could take this pair lower still.

If Leveraged Funds Stop Buying US Dollar Index, USD/CAD May Fall

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Chart source: CoT: Bullish USD Bets Continue to Grow as Trend Comes into Question

The key indicators on the chart are Andrew’s Pitchfork that had held USD/CAD on the move higher as well as the 100-DMA, both of which recently failed to hold up the price that was supported by the breakdown on the MACD (5, 34, 5.) The MACD shows a key breakdown after bearish divergence, and could argue that we’re no longer sitting with a broad US Dollar bullish bias despite institutional positioning.

The levels to watch with keen focus are C$1.2818 and C$1.3001 per USD. A break below C$1.2818 would argue the USD strength is cooling off and may show that USD/CAD bears are set to enjoy H2 2018

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---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.

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