Canadian Dollar Forecast: USD/CAD Breakout Snaps Back, 1.3750

Canadian Dollar, USD/CAD Talking Points:

• USD/CAD broke out to a fresh two-month high last week and snapped back aggressively after the Non-farm Payrolls report.
• The Friday bearish engulfing candlestick on the daily has so far continued through the new week but the question now is whether sellers can take out the 1.3750 level of prior resistance following the higher-lows that built in June and July.
• I looked at USD/CAD in the weekend video on the U.S. Dollar and I’ll be looking at an updated setup tomorrow in the webinar. You’re welcome to join, click here to register.

The U.S. Dollar went for a ride late last week. The Fed-fueled breakout ran through the Core PCE report on Thursday but that came tumbling down on Friday on the back of a surprising NFP print. The headline number disappointed but perhaps more shocking was the revision to prior months’ data. This was then followed by President Trump firing he head of the BLS, the department responsible for the NFP report, and then later in the session there were headlines of an early resignation at the Fed.

Collectively, this painted the picture that Trump may have advanced his position with the debate over rate cuts with the FOMC. Just a couple days earlier, Powell didn’t seem so sure about a September rate cut, and there was already debate of dissension within the Fed as two dissenting votes were cast for a rate cut last Wednesday. This was the most dissenting votes at a Fed rate decision in more than 30 years and it was obvious who the two casting votes for cuts were, as they had regularly been in the press over the prior month to broadcast their desire for lower rates.

But with Trump now in a position to name a new Fed governor and a new head of the BLS, markets have again warmed to the idea of a rate cut in September and, in-turn, USD weakness has shown.

In USD/CAD, that led to a bearish engulfing candlestick on the daily chart last Friday. Ahead of the reversal the pair had just set a fresh two-month high following the breakout from the ascending triangle formation, which itself was a counter-trend backdrop.

USD/CAD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Bigger Picture

When the USD was getting hammered in Q2 USD/CAD was a big mover, breaking below the 1.4000 psychological level and driving lower for much of the quarter.

The initial breakdown found support at the 1.3750 psychological level, which led to a pullback to 1.4000, after which bears went for another lower-low leading to a build of resistance at 1.3750.

On the other side of the matter, however, sellers could not evoke a test of the 1.3500 level in June. And then in July, sellers again shuttered away from 1.3500 and this time left a higher-low. The trendline produced from that higher-low was in-play a few weeks later, again helping to set another higher-low and this is what created the support side of the ascending triangle.

USD/CAD Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Shorter-Term Strategy

The big question now is whether USD bears can re-take control of the trend following the July rally. The USD set a fresh lower-low on the first day of Q3 and both weekly and daily RSI were oversold at the time, which contributed to the snap back in DXY last month. While US data retained a degree of strength via both CPI and PCE, the Fed seemed in no hurry to cut rates and that may remain, as Powell had said during the press conference that it was the unemployment rate that the bank was tracking. In Friday’s NFP report, that printed right at the expectation of 4.2%, so the question remains as to whether Powell’s insinuation from Wednesday, that this is an economy not desperately in need of a rate cut has changed?

In USD/CAD, the 1.3750 spot remains huge as this spot of support from May has been resistance multiple times in June and July. At this point, approximately 38.2% of the recent rally has been erased and the 50% mark of that Fibonacci retracement plots at 1.3728, which gives a big more reference to short-term bullish continuation scenarios.

USD/CAD Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist