Canadian Dollar Levels: USD/CAD at Make or Break Support

USD/CAD tagged a fresh six-month high last week and looked ready to rally into the 1.4200 handle. But buyers soon slammed into a brick wall just ten pips inside of a key zone of support-turned-resistance, and that’s led to a pullback so far this week as price hurried down for a test of the 1.4000 psychological level. Four days later, that support is still in-play, even as DXY has grinded down to a fresh low.

USD Themes

The US Dollar pullback is deepening with price pushing down to ‘s2’ support at the 98.98 Fibonacci level, and this happened after an attempted hold at the ‘s1’ level of 99.40 that seemingly failed even as news of agreement to end the government shutdown made its way through markets.

In USD/CAD, however, the pair continues to grasp on to the 1.4000 handle which is a major level in the pair and has been for much of the past decade as the broader range has built in a rather consistent manner. The 1.4000 level was a big spot of resistance back in May, following a bounce from 1.3750 which ultimately came back into play as resistance during the build of the ascending triangle in Q3.

Interestingly, bulls staged a fast breakout above 1.4000 shortly after the Q4 open; but for a major level of that nature it can often take time to gain acceptance, as we’re seeing now.  

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Big Picture

Looking at the long-term backdrop of the pair highlights just how important these major psychological levels are and have been. Back in February, when the pair was flying high on the back of the tariff trade, I harped on the 1.4500 level as that was a high water mark for the range over the past nine years. That’s ultimately what helped to stall the rally before the pullback began in March which turned into a short-term reversal in April.

These longer-term dynamics bear importance on the shorter-term backdrop, as a continuation of the current trend above 1.4000 would seemingly open the door to a run up towards longer-term resistance, even if there is minimized expectation of a long-term break of the range at 1.4500.

This monthly chart also illustrates the importance of the resistance ahead, around the 1.4151-1.4178 zone which is a zone of resistance-turned support from November to February, and this is what calmed the bullish breakout last week as that zone came closer.

USD/CAD Monthly Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD: Levels and Strategy

In webinars I often look across USD-pairs in effort of deducing which pairs are most attractive for strength or weakness in DXY. And as I’ve been saying for much of Q3 and into Q4, and then again this Tuesday, USD/CAD retains attraction for USD-strength scenarios.

This isn’t to say that support in USD/CAD cannot give way, but if it does, I question whether USD/CAD is the most attractive currency pair to work with that weakness, when a backdrop like EUR/USD or GBP/USD has shown healthier construction to counter a weak USD. USD/CAD, however, stands out if we see USD-strength come back, particularly if that 98.98 Fibonacci level in DXY plays as a higher-low support. The fact that USD/CAD has hovered around the same support for a fourth day highlights the deduction of Canadian Dollar weakness.

As an example of that 1.4000 level holding over a multi-day period, we only need to draw back to the month of May, when the bounce from 1.3750 was taking hold. The 1.4000 level traded for three out of four days, before a lower-high printed and then, ultimately, sellers took control and drove down to a fresh low.

Imagine the intra-day price action of that series, when price was poking above the 1.4000 level at which point sellers showed up – and that can be from both longs that had ridden the bounce and were now closing positions or opportunistic shorts looking to take advantage of a 'psychologically expensive’ price.

Again – there was no assurance that 1.4000 would hold as resistance forever, but the fact that it had at that point meant that traders could institute an if-then statement for both USD and USD/CAD. If USD-strength comes back, the support level of 1.4000 could present a compelling spot for a higher-low, which would open the door to a re-test of 1.4068 after which the prior high of 1.4041 would come into view.

On the underside of price – the big level is the 1.3900 area where price had turned two weeks ago, helped along by the BoC and FOMC rate decisions. If sellers take that out, it will look as though they have firm control of short-term trends but at that point I question whether there will still be a more attractive backdrop for Dollar weakness elsewhere, such as against the Euro or British Pound.

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro