USD/CAD rebound could be short-lived

The USD/CAD ended its bullish run abruptly on Friday as investors shrugged off employment reports from Canada (weak) and US (strong) and instead focused on a sharp rebound in oil prices. However, there has been no real follow-through in the selling pressure at the start of this week.

In part, this is due to a sharp rebound in the Dollar Index. The greenback has finally managed to catch a bid against the single currency as traders who had bought the EUR/USD pair in anticipation of Marcon’s victory in French elections, evidently took profit today. The GBP/USD has also weakened in the EUR/USD’s slipstream, while the USD/JPY has bounced back after a weaker open.

Another reason for the bounce in the USD/CAD has been oil prices which have fallen again despite on-going jawboning from Saudi’s oil minister, who has again spoken in favour of extending the OPEC productions cuts.

But despite the weakness in crude oil prices and US dollar’s bullish day, the USD/CAD could still fall back now that it is testing a key resistance area and after posting reversal-looking price patterns at the end of last week.

As can be seen on the chart, the USD/CAD reversed sharply on Friday to create a bearish engulfing candle on its daily chart. The resulting sell-off caused the weekly chart to print a doji candle, which is typically found at tops and bottoms of a trend.

If these technical signals are valid bearish signs then today’s bounce in the USD/CAD could be a trap for the bulls and present an opportunity for the bears to get on board at favourable prices.

In fact, the USD/CAD was testing a key short-term level around 1.3730 at the time of this writing. This level was the last support pre-breakdown on Friday (one can see this level on an intraday chart). Consequently, it could turn into resistance, leading to another drop.

However, if the USD/CAD doesn’t turn lower here and goes on to break above last week’s high then this would invalidate the bearish setup. In this potential scenario, the Loonie may rise to test the long-term 61.8% Fibonacci retracement level at 1.3840 as the next bullish objective, possibly ahead of 1.40 next. 

Source: eSignal and FOREX.com.

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