Canadian Dollar Forecast: USD/CAD Reverses – What’s Next?

I looked at USD/CAD yesterday and despite being bullish on the pair for the past few months there was mounting evidence of pullback and possibly even reversal potential. That’s taken another step forward this morning with a pull back below the 1.4000 psychological level while also showing a downside break of the rising wedge formation. This diverges from the DXY backdrop that sees bulls continuing to push, begging the question as to whether USD/CAD is starting to align more attractively with USD-weakness scenarios.

It's been a strong few months for USD/CAD as the pair began to diverge from broader USD trends back in June and July. As the USD set a fresh three-year low on the first day of Q3 trade, USD/CAD held a higher-low, and the trendline produced from those higher lows built an ascending triangle formation. The resistance for that setup was the 1.3750 level that was support back in May, and there were a few tests at that resistance until the breakout ultimately took hold later in July. And once it did, bulls made a more concerted push, holding three support tests at that prior resistance of 1.3750 and, eventually, buyers were free to push up for a test of the 1.4000 level.

That price of 1.4000 is a big deal for the pair as it’s demarcated resistance in the decade-long range for USD/CAD. And more recently, back in May, when 1.3750 held support, that bounce stalled right at the 1.4000 handle that saw a week of defense before bears were able to re-take control.

USD/CAD Monthly Chart

Chart prepared by James Stanley; data derived from Tradingview

Perhaps the most attractive element of USD/CAD over the past few months was that divergence with broader USD-trends. I’ve been tracking the pair as a bullish USD setup and that’s largely held given the bullish formation, even as DXY dwindled near multi-year lows. That led to a strong bullish move, especially after the Fed’s rate cut last month.

In USD/CAD, that FOMC rate cut was the last time that price tested 1.3750 and even that took on a bullish tone as price held a slightly higher-low before rallying into a move that eventually took out the 1.4000 handle, a feat that the pair couldn’t show back in May when sellers defended that level well.

But more recently that’s begun to shift, which is why I started to push USD-strength scenarios towards USD/JPY in yesterday’s webinar.

USD/CAD Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Rising Wedge

The beauty of formations and price action in general is its objectivity. Like we saw with the higher-lows and the ascending triangle back in June and July, even as the USD remained fairly weak elsewhere, price action can hint at whats around the next corner.

And in yesterday’s webinar there was the build of a possible bearish reversal as shown from the rising wedge formation. This took place after the push above 1.4000, and bulls’ inability to drive significantly higher even as buyers remained aggressive near support allowed for the two different trendlines to define the formation.

That formation has since given way to a downside break and that’s pushed back below the 1.4000 handle. The 1.3981 level that I’ve been using to define that resistance zone is now in-play as support for the current low of the day, and sellers now have an open door to make a greater push.

USD/CAD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Shorter-Term Structure

From the four-hour chart we now have the build of lower-lows and lower-highs, and this is something that could potentially lead into that larger pullback scenario. But, for that to happen, we’ll need to see sellers continue to defend lower-high resistance, and that 1.4000 level has now become a prime spot to look for that to take place. Above that, there’s a spot of prior support turned resistance at 1.4034 that remains of interest. And over that is the 1.4061 level, which I’m currently considering invalidation for bearish scenarios in the pair.

USD/CAD Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist