This week’s dollar drop across the board (e.g., EURUSD rising, USDCAD falling) was mainly driven by no significant news and could be best described as normal market action during corrections within a trend. The dollar has risen a lot this year as part of a broad and sustained bull trend, and within any trend, there are corrections.

Importantly, nothing fundamental that drives the USD bull trend has changed recently. Despite all the talk and speculation about the Fed “pivoting” (shifting) to a more dovish stance, what we saw this week is other central banks are actually turning more dovish before the Fed had a chance to say. Yes, the Fed meeting is next Wednesday (Nov 2), and they could deliver a more dovish/neutral message there; but that would only mean that nothing in the relative central bank stances has changed (if other central banks are also pivoting dovish at the same time, then it’s not a negative for the USD).

This week, the Bank of Canada and the European Central Bank both surprised dovishly. The BOC delivered a smaller rate hike than the consensus expectations (actual 50bp vs 75bp forecasts). USDCAD jumbled on the announcement but later resumed the decline as part of the broad USD correction mentioned above. However, if the US dollar resumes its uptrend, USDCAD will probably start climbing again, with the 1.40 zone standing at a reachable distance. Our trade idea for this week is based on this view.

USDCAD Rebounds at 1.35 Support Zone 

A glance at the daily USDCAD reveals that the pair is reacting at the 1.35 support zone for the 2nd time this month. The 1.35 level is important psychologically and also represents the 38.2% Fibonacci retracement of the recent upswing from August 11 to October 13. The actual high reached then was 1.3877, just 23 pips shy of 1.40. If USDCAD starts a new bull leg, 1.40 will likely be achieved.

Resistance of the retracement leg stands at the 1.37 zone (see chart). Thus, a bullish break of 1.37 should encourage stronger upside momentum; perhaps a faster rise toward 1.40 could happen once 1.37 is cleared.

However, given the overall USD bullish trend and the bullish trend in USDCAD itself this year, looking to enter long at lower levels - without waiting for 1.37 to break - also looks like a viable strategy. 

Entry:

• Short around current levels near 1.36;
• Or closer to 1.35 if the market offers such an opportunity

Stop loss:

• Below 1.35

Targets:

• 1.40