CAD Technical Analysis

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.

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.

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The Canadian Dollar has traded alongside other commodity currencies as a lower-Beta form of EMFX, which were hit hard by the surprise election victory for Donald Trump. The higher price of USD/CAD on the post-election trading day has validated the uptrend that has unfolded in a choppy fashion since early May.

On Monday, Donald Trump said that voters in the U.S. would deliver “Brexit plus, plus, plus.” Now, traders are looking at that statement to understand what the implications of the statement mean, and how trade partners could be affected by President-Elect Trump’s new policies. The implications of new trade policies that are likely to be redrawn under the Trump Presidency was most clearly seen against the Mexican Peso that fell by nearly ~12% early on Wednesday as the votes were tallied to the point to declare Trump as the President-Elect.

A similar move as seen in MXN or even the offshore Renminbi that is also trading at its weakest level ever against the USD could bleed over to commodity FX with heavy trade exposure to the U.S. like the Canadian Dollar. We heard Canadian PM Trudeau said he is looking forward to working toward a stronger working relationship with Trump, and a push higher in Crude could help Canada.

Many traders have looked at 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. 2-year, which can be seen as a proxy of the Federal Reserve’s policy rate path has widened on the day after the election. Longer on the curve, the US 10-Yr yield has an intraday move of 23 bps that would be a record intraday move, and the current open-close range would be the largest move since 2011.

In addition to yield spreads, traders may want to keep an eye on Bank of Canada Interest Rate expectations. Depending on how aggressive the Trade Agreements are re-arranged, we may hear more dovish language from the Bank of Canada that could encourage a Bank of Canada Rate Cut that was first entertained when Stephen Poloz noted that the Bank of Canada discussed stimulus at their last meeting.

Technical Focus:

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The last week of 2016 trading has brought about USD weakness. As we come into the Macro Opening Range of 2017, traders will do well to keep an eye on a breakout above the 50% retracement of the 2016 range. The market tested the key 50% Fibo in mid-November but failed to close above it, and we’ve seen a similar occurrence in late December.

However, a close above the 50% Fibo (1.3575) in the first weeks of 2017 could usher in another strong move higher like we’ve seen in the first trading month of the year in USD/CAD in the prior couple of year.

In addition to watching the 50% retracement as resistance and validation of trend continuation, the most important component on the USD/CAD chart remains the strong bounce off of multiple levels of support all near 1.31/3075. This price zone combined the 200-day moving average at 1.3087, the 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. The bounce came as the market digested the Federal Reserve’s actual hike and added a more hawkish Dot Plot.

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USD/CAD broke below 1.3300 on Wednesday morning, which puts the pair on a downward trend the start of 2017. USD strength continues to be a broader theme that many are still watching, but we have recently noted that DXY is found resistance in the medium-term while RSI(5) is showing bearish divergence that could allow other currencies like the Canadian dollar to gain ground.

One of the key themes that have developed over past weeks for the Canadian dollar is a supportive Bank of Canada that looks to err on the side of hawkishness that could continue to support CAD and put further pressure on USD/CAD.

Watching the chart below, we are starting to face major moving averages worth noting. The 100-day moving average sits at 1.3256 followed by the 200-day moving average at 1.3094. While the entire move higher from the May 2016 low has been choppy, traders who bought deep dips in USD/CAD have been rewarded, albeit likely bloodied a bit too.

One strong technical point worth keeping an eye on is the trend line drawn from the higher lows in the base of the channel created with the Modified Schiff pitchfork near the 78.6% retracement of the December range near 1.3200.

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We’ve seen Canadian Dollar strength that is backed by much of the Commodity run and subsequent USD weakness since the Fed hiked in December. However, February has been a sideways affair.

I’m awaiting a price breakdown and close below the support levels of 1.3083/76 to validate the view. However, we do see a lot of support at 1.3000 as the price continues to hold up above 1.3000 or find bids. Regarding resistance, the price has had a difficult time breaking above the twin forms of resistance of the 200-DMA at 1.3148 and the Fibonacci Zone that currently rests at 1.32274/31285.

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The Bank of Canada seemed to provide fuel for USD/CAD bulls with the statement that core inflation measures “continue to point to material excess capacity in the economy.” The statement combined with USD strength to stretch the 2-year differentials to their widest in 3-months. Betting against a pair that is showing the steepest yield differential in a quarter is a bet against momentum, which can be painful when wrong.

Sticking to the tenet of not fighting strength, nor buying weakness, we’ll look for the topside to continue in USD/CAD even if USD shows some exhaustion after the strong run higher at the start of the week. Many traders are keeping an eye on the 1.3350/80 zone as a price level to watch. A close above this zone could mean that we’re soon to move to the top half of the channel toward 1.36/38. The additional Fundamental risk for the pair is Canadian GDP on Thursday followed by key Fed speaker’s Yellen & VP Fischer on Friday.

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CAD/JPY: bearish reversal. Daily price was located on the bullish ranging markety condition since Devember 2016: the price was ranging within narrow support/resistance levels to be moving near-and-above Ichimoku cloud and inside Ichimoku cloud on the border between the primary bearish and the primary bullish trend on the chart. The price broke Ichimoku cloud to below at the end of the Februarythis year to be reversed to the primary bearish market condition with 84.67/84.17 support levels as the nearest daily bearish targets.

• if the price breaks 86.81 resistance so the reversas from the primary bearish to the primary bullish market condition will be started;
• if the price breaks 84.67 support level on close daily bar so the primary bearish trend will be resumed with 84.17 target to re-enter;
• if not so the price will be ranging within the levels.

Resistance	Support
86.81	84.67
N/A	84.17

The foe to CAD Bull’s has become a friend. Oil rose for the second day in a row on Wednesday after refinery usage data rose aggressively, signaling the US stockpiles may draw down and the market may begin to balance. The correlation of the Canadian Dollar to Crude Oil has risen recently after spending a few months disjointed.

As of Wednesday, March 29, 2017, Crude Oil has a 20-day rolling inverse relationship with USD/CAD and USD/MXN of -0.557 and -0.579 respectively. The inverse correlation shows us as Oil moves higher, USD/CAD and USD/MXN move lower, albeit not perfectly. Therefore, we should watch Oil to get a sense of what may happen next with USD/CAD.

Currently, USOIL is trading near the 200-DMA, and a failure to break back above on a sustainable basis may lead to further upside in USD/CAD, which the current channel seems to favor.

The spot price of 1.3330 sits above the March 22 low support at 1.32635. Just below the March 22 low is the 50% retracement of the late January to March Range at 1.32517 followed by the 61.8% retracement at 1.31846. Such levels should be watched if Oil gains compound. The resistance in focus in the current move lower is the March 28 high of 1.3414. A reversal below the proven support of 1.3050/150 would need to break to turn the technical view from neutral to bearish.

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USD/CAD

Last week’s update noted that “USD/CAD has revisited the highs so the bull trap possibility is back on the table. The long term parallel (support in October 2015 and resistance in late 2016) is near 1.3700. The 61.8% of the drop from January 2016 is 1.3838.” The lower end of the range has been met (high was 1.3697 today). Some of the biggest pivots in history have occurred on the long term slope lines shown above. We’re in the vicinity so pay attention.

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The USD/CAD has broken to new yearly highs this afternoon, despite a general US Dollar selloff in the market. As this trend develops, traders should continue to monitor upcoming new that may help provide further direction for the pair. This includes both US and Canadian employment figures which are set for release at 12:30 GMT this Friday. Expectations for US Non-farm Payrolls (APR) are set at 190k, while CAD Net Change in Employment (APR) is expected in at 10.0k

Technically, the USD/CAD remains in an uptrend going into Friday’s news. If the standing trend is set to continue, traders should watch for a breakout above the new 2017 high found at 1.3757. However in the event of a price reversal, traders should look for the pair to first decline below its 10 day EMA (exponential moving average). This line is currently found at 1.3607 and continues to act as a critical values of support. A breakout below this point would suggest a shift in the pair’s short term trend.

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