Canadian Dollar Outlook: USD/CAD Rides into Reversal Risk

USD/CAD, Canadian Dollar Talking Points:

• USD/CAD showed a dominant bearish trend in Q2 but the move fast became oversold in early-April and pullbacks have been limited since, illustrating a still heavily bearish backdrop for the pair.
• More recently a pullback in USD from oversold conditions has helped USD/CAD to hold a higher-low as sellers were unable to test below 1.3500. Now, there’s another resistance test at 1.3750 and it looks like there’s an open door for bulls to test a breakout.
• I look into USD/CAD each week during the webinar and you’re welcome to join the next. Click here to register.

If we step back to the weekly or even monthly charts and look at the big picture in USD/CAD, the short side of the pair remains attractive. This is owed to the range-bound backdrop that’s held in the pair for almost a decade now. This is what helped to bring the pullback-turned-reversal back in February, March and April, and it’s something that’s going to carry importance in the pair until price leaves it behind. But, at this point, there’s no indication of that happening anytime soon.

USD/CAD Monthly Chart

Chart prepared by James Stanley; data derived from Tradingview

The complication lies in the timing of the matter, as that short-side trend that took over into and through the Q2 open was so pronounced and aggressive that there’s only been a minimum of pullback so far. Even during the four-week USD rally from the Easter Monday lows into mid-May, USD/CAD lagged, finding resistance at the 1.4000 handle until sellers, eventually, were able to drive down to a fresh low.

But sentiment is important, and if most parties willing, able and wanting to be short already are, it can be a challenge to induce bearish continuation as that heavy one-sided positioning becomes prone to pullbacks on profit taking. And if resistance gets taken out, that profit taking can soon turn into a short squeeze scenario. This can serve to reset that sentiment a bit as shorts that have been holding through the downtrend cover positions and then this invites bears to come in to defend resistance at lower-highs. If they don’t, and price continues to rally, well that short squeeze can soon turn into a bullish trend; but if they do, then short-side continuation can remain attractive.

At this point sellers have continued to defend resistance in USD/CAD but that’s becoming a less frequent or obvious occurrence. In Q2, we saw 1.4000 hold the highs in May and then in June, it was the prior support at 1.3750. More recently, it was another zone that was holding the highs at 1.3679-1.3694 and that’s been in-play since last Monday. But continued persistence from bulls has allowed for a larger topside move, with price stepping up to the next resistance at 1.3750.

This gives the appearance that a stronger pullback can follow as that elongated bearish trend sees shorts cover amidst a broader pullback scenario in the U.S. Dollar.

USD/CAD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Shorter-Term

If we go down to short-term charts this is why I think we could be in the midst of a deeper bullish move. After resistance at 1.3750 yesterday, the pullback held support in that same zone of prior resistance, from 1.3679-1.3694, and that led to an extension of the rally with a fresh higher-high. And so far, at a very early stage, we’ve seen defense of support at prior resistance, around that same 1.3750 area.

If bulls can force a push, there’s follow-through resistance at the June swing high of 1.3798 after which another zone of resistance comes into pay from prior support, around 1.3889-1.3905. And then of course above that, we have the 1.4000 handle which will be a major decision point if it comes back into play.

As I’ve said in webinars, I could even see a rally running up to the resistance-turned-support of 1.4151-1.4178 while allowing for a larger bearish bias to remain in-place. But, for now, bulls have their work cut out for them around the 1.3750 level.

USD/CAD Hourly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist