The two ways USD CAD bulls went bankrupt

“How did you go bankrupt?”

“Two ways. Gradually, then suddenly.”

- Ernest Hemingway, The Sun Also Rises

A Hemingway quote is about the most American way to start an article that I can think of, but in this case, it’s US dollar bulls who have gone bankrupt, particularly against the Canadian dollar.

Much like a consumer’s gradual accumulation of debt, the USD/CAD uptrend has been steadily losing steam for months. The pair created a triple bearish divergence in the RSI indicator over the last three highs, showing fading buying pressure. Over the last three weeks, the pair failed to make any upward progress whatsoever, warning of a possible tipping point.

Inevitably a consumer’s debt burden becomes unbearable, leading rapidly to a declaration of bankruptcy, and similarly, USD/CAD bulls “suddenly” opted to abandon their positions en masse over the latter half of this week. This sharp downward move was preceded by a breakdown in the RSI indicator, which recently broke below its bullish trend line. From a fundamental perspective, the proximate causes for the big drop were a big rally in oil Wednesday (since retraced) and yesterday’s dovish Federal Reserve meeting, but much of the drop could be chalked up to frustrated bulls finally bailing out of the crowded trade.

Earlier today, the North American pair dipped all the way down to within 12 pips of the psychologically significant 1.30 level, but rates have since bounced back over 100 pips. In our view, this could simply represent profit-taking by the bears ahead of the weekend, so a deeper retracement is definitely possible next week. If the 1.30 support level is eventually breached, a continuation down toward major previous-resistance-turned-support at 1.2800 could be in play. Meanwhile, bulls need to see the pair break back above last week’s high at 1.3300 to shift the bias back in favor of the bulls.

Source: City Index