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USDCAD recorded two pin bar patterns at the 1.25 area over the last two trading days. It wasn’t an outright bullish candle like a hammer or morning star, but still a decent rejection of levels below 1.25. It indicates support here is holding.
With the Fed and Bank of Canada meetings both taking place next Wednesday (4 hours apart), it’s hard to see the currently established range between 1.2570 and 1.2450 breaking. The most likely scenario is that it holds into the Fed and BOC
meetings, after which we can expect a breakout in one way or the other.
USDCAD could start moving up again as risky assets feel the impact of a hawkish Fed
USDCAD is in a very interesting situation at the moment, where the pair could be pulled in opposite directions by the two central banks. Namely, both the Fed and the Bank of Canada are preparing to tighten policy and hike interest rates soon as inflation is running hot above their targets.
USDCAD fell steadily (CAD stronger) from the Covid lows in March 2020 to summer 2021, when it bottomed. Since then, it has been largely range-bound with a slight upside bias as the range is seeing marginal higher highs. The key event that triggered the bottom in June 2021 was the Fed’s hawkish shift at their meeting that month. The Fed then announced that they will not hesitate to raise interest rates to combat inflation, which at the time was just
beginning to accelerate.
The interesting highlight for USDCAD from this situation is that the Fed’s stance seems to be a key driver of CAD trends. Despite the continued hawkishness of the Bank of Canada and the strong Canadian economy throughout 2021, USDCAD has repeatedly failed to break lower. This is an important point at the current juncture, just as both central banks are holding meetings next Wednesday and USDCAD is testing support in the 1.25 area.
The CAD, being a risk-sensitive currency, will likely face strong headwinds once the Fed starts tightening.
Keep an eye on stocks and oil for USDCAD
The Fed is often (rightly) regarded as the central bank to the world. The USD is the global reserve currency, and when the Fed tightens policy, it strongly impacts global risk appetite. This can keep risky assets on the defensive going forward, and in fact, we are already seeing that playing out with the correction in equities so far this year.
If stocks (e.g., S&P 500) break below the current key support, risk appetite could be seriously hurt, as in this case, a deeper sell-off in stocks will become much more likely. In this situation, it will be very hard for risk-sensitive currencies like the CAD to appreciate (and AUD, NZD also). In fact, we can expect the opposite. The last thing USDCAD would need to thrust higher is oil prices rolling over too. And uptrend in oil reversing would also be much
more likely under a risk-off scenario.
So, the key markets and events to watch for USDCAD are stocks and oil, and what the Fed and BOC do. The two central banks will give us their latest input next Wednesday, and we may already see USDCAD volatility picking up. There is a decent risk that the Fed will surprise hawkishly next week, and it will be key to watch how the major stock indices react (S&P 500, NASDAQ).
Due to the above reasons, it seems the odds are turning in favor of a higher USDCAD. However, we may need to wait a little more for the stars to fully align as these trends in risk appetite can take time to unfold.
See the “Trade Plan” section below for how to trade USDCAD in the current circumstances.
USDCAD Technicals: 1.25 support is holding, but a test lower is possible
As we noted earlier, USDCAD has been rejecting lower levels below 1.25 on several occasions so far. It is also rejecting a close below the 200-day moving average (red).
In the larger picture, USDCAD seems to be also testing support at the lower border of the upward sloping channel formation (starting from June 2021). As can be seen on the chart below, we highlighted the channel borders as wider area zones to capture more possible scenarios. For instance, USDCAD could break below 1.25, but still not break the channel’s lower border all the way down until the 1.23 zone.
In this sense, the current range between 1.2570 and 1.2450 is also of particular interest. Namely, there is still a possibility for a downside breakout, which would clear the road for a deeper test into the channel’s support zone, probably toward the 1.23 level.
Our opportunity to enter long on USDCAD is somewhere between the current levels and the levels toward 1.23. The market should show us the way soon.
Firstly, wait for next Wednesday’s Fed and BOC meetings to pass. Once the dust settles from the volatility, the market and the price action may give us clearer signals if USDCAD will start moving higher from here or whether it wants to test lower levels first.
Based on this, there would be two scenarios to enter long:
Entry:
- 1st scenario (bullish from current levels): Wait for a break of the recent range high at 1.2560. A bullish W pattern or double bottom will be completed in this case and would signal the lows at 1.2450 are the final ones for this cycle.
- 2nd scenario (USDCAD first tests lower levels toward 1.23): If instead of breaking the recent range up, USDCAD breaks to the downside, then look for bullish reversal patterns and signals on the daily chart at the 1.23 - 1.2350 area. A bullish signal there should indicate that this support will hold; hence it’s crucial to wait for one to occur before entering.
Stop:
- 1st scenario: below the recent 1.2450 lows
- 2nd scenario: in this hypothetical situation, 1.23 should be the stop loss level, though the exact details would depend on the specific situation at that point.
Targets:
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