Canadian Dollar Forecast: USD/CAD Rally Nears Key Point in Trend

USD/CAD, Canadian Dollar Talking Points:

• USD/CAD has been one of the cleaner major pairs for USD-strength over the past three months, but now that USD is threatening a larger breakout, USD/CAD is acting subdued below a major spot of possible resistance.
• The 1.4000 handle was key back in May as it held a bounce from 1.3750 and led into another push from bears. That 1.3750 level soon came in as important – helping to set resistance for an ascending triangle that broke out back in July and then became support even as recently as three weeks ago.

USD/CAD was an outlier for much of Q3, as the pair was one of the few majors that showed some element of US Dollar strength, even as DXY was melting down elsewhere. The USD set fresh lows on the first day of Q3 and then again on the Fed’s rate cut in September, but in USD/CAD, there was bullish drive as the pair had built into an ascending triangle in June that broke out in July:  And when the Fed did cut rates, there was a clean support test of prior resistance from that formation which then led into a strong rally back up towards the psychological level at 1.4000.

The challenge now is that there’s been a more recent case of divergence going in the other direction. USD-strength has shown more noticeably since the Fed’s rate cut, and this week has seen that theme take on even more strength. As looked at earlier on the day, the US Dollar is vying for a breakout at a major level, the 98.98 Fibonacci level which is also confluent with the resistance side of a falling wedge formation.

In USD/CAD, however, bulls have been a bit more shy, and I think that draws back to chart location as the pair is nearing a major psychological level at the 1.4000 handle.

This doesn’t necessarily reverse the bullish bias – but it does make it more of a challenge to chase, especially given the way that price had held bulls at bay back in May of this year.

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Shorter-Term Strategy

I discussed this in greater depth in the Tuesday webinar and the support level that I highlighted then has already come into play, plotted at the 1.3936 area, and that’s led to a bounce.

The challenge at this point is proximity to that resistance zone looked at above, which runs from 1.3981 up to the 1.4000 handle. This is the same zone that I’ve been tracking for a while on the pair and so far that’s served as rigid resistance.

From the daily chart above, we can see a continued series of higher-highs and lows and with today’s bounce from support, that higher-low sequencing can remain intact, but bulls are going to need to make a press deeper into the resistance zone to follow that up with a higher high. Failure to do so highlights the 1.3889-1.3905 zone as secondary support, and as I looked at in the webinar, a hold above the swing low from last Tuesday keeps the door open for buyers, and that plots at 1.3870.

As looked at ahead of the Fed’s rate cut, when USD/CAD was re-testing the 1.3750 zone as support and ultimately held at a higher-low, that bullish anticipation element can be a key determinant as to whether the trend remains workable; and for now, it’s the 1.3870 support swing that’s in the conversation for such in deeper retracement scenarios.

USD/CAD Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist